The Basics of Retirement Planning
- By Sean Hyman
- Published 01/13/2009
Sean Hyman
myWealth.com provides affordable, online personal finance courses that enable everyone to effectively manage their money by making sound financial decisions. Making sound decisions is a prerequisite to achieving your financial goals and becoming financially secure. myWealth.com offers numerous courses that cover investing, managing ones personal finances and currency trading. myWealth.com's team of instructors, led by Sean Hyman, pride themselves in thoroughly answering questions and patiently
As a financial planner I always found it a real challenge when meeting with people that were getting ready to retire and had a plan that would make them bankrupt in 15-20 years. I had to try to explain, that their plan was flawed and they were going to be drawing out too much money! It was hard for people to see beyond a 10 year horizon in their life. People would come to me with a distribution plan in which they were planning to draw down their money in retirement and it would only last them 15 to 20 years, and they would be in their late 50’s or early 60’s which would mean that they would be out of money at age 80 or less. Obviously, not a good plan, because most people are very active well into their eighties.
This was very common, and at times, it was difficult to get people into the proper mindset, and understanding that they were not looking far enough into the future. What I found to be most effective was, having people step back and forget about their own retirement and say “let’s pretend you hit the lotto!” Let’s say you won a million bucks (after taxes) in the lotto, and you came to me and asked how much money could I spend a year and yet make certain that this million bucks last for years?
A good question that most people fail to ask and a big reason why so many people ending up mismanaging their money. It is really not that hard to manage your finances, when you ask good questions like this. Do you have a personal finance question e-mail Bob?
The answer is about $40k per year or 4%. If it was 2 million bucks it would be about $80k and obviously still 4%. Without crunching the #’s if your average rate of return is around 8%, assuming inflation is about 3%, you will be drawing out 4% and you will have a 1% cushion for growth.
An 8% rate of return after taxes is not that hard to achieve over a long period time with a basic 50/50 or 40/60 stock /bond portfolio in which you rebalance. Managing the volatility is really important, and the biggest problem for many of the folks that retired in the last 10 years.
Remember you could draw out more like 5% or 6%, and you might be OK depending on performance of the market in that time frame. Drawing out amounts like 7% or 8% and there is a very high chance you will be out of money in 20 years, unless you have really great investment performance. With 4% withdrawal rate there would be a very low chance that you would be out of money in 30 years.
Understanding some of these basic concepts can really add up and help you make a lot of better decisions about your financial future. This is really important concept to understand before retiring, and make certain that you have a realistic financial plan for the rest of your life.
When people come into a lot of money, they generally always assume they can spend a lot more than they really can. Running the numbers and taking a more scientific approach is a must! There are a ton of great calculators out there on the internet.
Please feel free to post any questions or comments! And check out our courses.
Sincerely,
Bob O’Brien
