It is no secret that the investment landscape has changed significantly over the last few years. We are witnessing a sea change to many of the traditional investing principals of years past. The financial markets are more dependent than ever on the coordinated actions of policymakers around the world. No longer can we totally rely on fundamental company and economic analysis to make investment decisions. These can still be valuable, but pale in comparison to the role governments around the world are taking in trying to get the policy decisions correct. In this environment, economic growth and investment returns are expected to be below their long term averages for the foreseeable future. With all this going on, now is an important time to rethink your retirement plans.
Many consumers planned on their home values being a significant contributor to their retirement. This is not going to happen for most. The combined effect of lower housing values, investment declines, longer life expectancies and the prospect of low returns going forward make this a real game changer when it comes to retirement. Most consumers are going to have to work longer, save more…a lot more, and be more realistic about their spending and rates of withdrawal during retirement.
Working a few more years can have a tremendous impact on your long term retirement success. Every extra year you work is one less year you have to support yourself in retirement and one more year of additional savings toward retirement, a powerful double whammy. If the rates of return on our retirement savings are going to be below average then we simply will need to save more. Consider a simple example; assuming you could earn a static 6% annual rate of return you would need to save $1,021 per month for 30 years to accumulate $1 million in a tax-deferred account, like an IRA or 401(k). A 20-year period would require you to save $2,195. Better get going!
So let’s assume you accumulate a $1 million. Great! That’s a lot of money. But how much income will that reasonably provide someone during a 25-30 year retirement? Less than most think. The general consensus among financial advisors is that retirees should plan on a portfolio withdrawal rate of 4% to 5%. This is the percentage of the portfolio’s value that is withdrawn in the first year of retirement. The amount is also assumed to be increased each year for inflation. So, if you have $1,000,000 saved you can reasonably expect to have that account support a draw of $40,000 to $50,000 per year plus inflation for a 25 to 30 year retirement period. Doesn’t seem like much does it? We all need to rethink retirement!
Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.
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