April showers: Raining on the Retirement Industry's parade
When I ask people ‘what’s your retirement plan?’ they usually respond with something like ‘I’m maxing out my 401k’, ‘taking advantage of the catch-up provision’, etc. We’re taught by the financial institutions & media that it’s the ‘best way to save for retirement’. But a 401k is merely an accumulation plan. Retirement is about distribution. The distribution rate in retirement has a much greater impact on our retirement income than the accumulation rate prior to retirement. People and their advisors are typically focused on Rate of Return, how the stock market is doing, and trying to maximize the account balance prior to retirement, i.e. accumulation? What is the plan to distribute income from the 401k after you retire? Is there one? Is there a plan to mitigate some or all of the taxes on those distributions? Taxes could eat up over 40% of your withdrawal! And has the biggest retirement risk called ‘sequence of returns’ even been brought to their attention? Sequence of returns risk (which also incorporates the risk of longevity, i.e. outliving your money) is the main reason financial planners are recommending a withdrawal rate from an investment portfolio of 2.8%-4% per year. That means you are ‘allowed’ to withdraw $28,000-$40,000 per year per $1,000,000 you have accumulated. Who can live on that? And how is that efficient? And BTW, the 2.8%-4% withdrawal rate does not guarantee that you won’t run out of money, it only decreases the probability of running out!
This is the industry’s answer to retirement income planning. Seriously. And it doesn’t even address other retirement risks like adverse health events, inflation, taxes, caring for aging parents, etc.
But what if it were possible to increase your withdrawal rate to 6-8% and have more effectively mitigated sequence of returns risk, as well as all the other risks retirees face? Which plan would you rather have? Is your goal to create more wealth for retirement or is your goal to create the maximum income so you can spend & enjoy your wealth at retirement? Would you rather have accumulated $10M with a withdrawal rate of 3.5% or $8M with a withdrawal rate of 6%?
Just a little food for thought on a gloomy spring morning in NJ. Results vary on a case by case basis and can only be achieved through proper positioning prior to retirement. There is no one financial vehicle that can do this. It is achieved only through proper coordination and integration of the Protection, Savings, and Growth components of your model. Let me know if you’d like to review how we can or have already built this into your model.
And if you need a little pick me up to get you through the day, watch this video. And even better, watch it with your kids/grandkids when you get home.
Happy spring (I can’t wait to see those May flowers after all this rain!)! Please don’t ever hesitate to reach out to say hello!