Let’s face it. Since the global recession of 2008, the fear of losing your retirement money has become prevalent in America. So, how can you make sure you’ll be able to stay retired, instead of running out of money and having to move in with your kids or go back to work?
In order to find a safer approach to retirement, you first have to understand how most people plan for retirement.
The majority of people who have saved up and invested retirement money beyond their company’s 401(k) plan turn to stockbrokers or bankers because that’s all they’ve heard about or have seen advertised on TV. The perception is that these people are advisors with a big brand name attached to them, so they must know what they are doing.
And, it’s true, most of the financial professionals working for big-name brokerages or banks do a decent job during the accumulation phase of your financial life—when you are in your 20s, 30s and 40s—and have a long time-horizon before you will need to tap your retirement funds. During this phase of life, you can afford to “buy and hold” and wait through market crashes for the next bull market run, because you are still working and earning money. You may even pick up some bargains.
But, as you get older, everything changes. You need to take less risk with your money, because you are going to need it. You will soon stop working, and no new money or paychecks will be coming in, other than earnings you can garner on your nest egg. The money you’ve saved is what you have to live on for the rest of your life, and you cannot afford to lose it in another market crash.
Unfortunately, the vast majority of brokers and financial professionals do not specialize in retirement, and they continue handling retirement using methodology that works for younger people—the pie chart. Their methods are flawed for retirement; they don’t change their strategy as you get older, other than to put your money into more bonds. This led to the failure of retirements for millions of people just over a decade ago during the last recession.
It makes no sense to keep using the pie chart methodology today for retirement. It’s not safe. Yet few, it seems, have learned from history.
The Pie Chart
Here is a typical “diversified” asset pie chart. Unfortunately, all assets but the cash (3%) are subject to various risks like market risk, including bonds. According to Morningstar, it takes an average of 6 years to recover from a 40% drop in the market like we saw in 2008—if you don’t touch the money. But, if you are in retirement and withdrawing money from a fluctuating account, you may never recover.
Bonds Aren’t Safe
The common financial adage you will hear from brokers is that you need to move more of your money to “safety” as you get older—to them, this means bonds or bond funds. (Read “Bonds As Safe Investments for Retirement” to learn more about the differences between bonds and bond funds and why they are definitely not safe.)
There is even a rule they still use called the “Rule of 100” that says that the percentage of bonds you have in your portfolio should be equal to your age, with the rest in stocks. Therefore, every year as you get older, you should move another 1% of your portfolio out of stocks and into bonds. The problem is, bonds are earning next to nothing right now due to historic low interest rates, and if interest rates rise, bond prices will fall.
The Magic Number Using the 4% Rule
When and how to retire using the pie chart method relies on some “pie in the sky” amount of amassed money based on stocks and bonds’ average return rates through all time. Your retirement plan will be to draw 4% (or 2% or whatever magical percentage) from your magic number you’ve accumulated in your pie chart.
This number that you supposedly have to have saved in your pie chart is often in the millions of dollars. People often come into our office and tell us they don’t have enough money according to their broker, and they’re shocked to hear that they might already have enough money to retire using an actual retirement distribution plan instead of a pie chart.
We can’t stress enough that you’re compromising your gains and accentuating your losses by drawing income from a fluctuating account.
The 4% rule was discredited by its creator back in 2008. Furthermore, brokers who don’t specialize in retirement aren’t taking into account all the moving pieces of a complete retirement plan, like optimizing Social Security benefits and pensions, and accounting for tax mitigation and inflation.
The pie chart stresses retirees out. It causes them to live below their means, and it causes them, most of the time, to feel like they will not be able to enjoy their current standard of living in retirement. Time after time people who have saved up $300-500,000 or more are coming in to our office worried that they won’t ever be able to retire and continue the lifestyle that they want in retirement, and we show them that they can.
The Spreadsheet Versus the Pie Chart
With the pie chart, retirees face significant risk because the market historically crashes every seven or eight years, like in 2008, 2000, 1994, 1987, 1980…you get the picture. With the pie chart, you can only see what you’re going do this year, you can’t see next year, five years, 10 years, or 40 years down the road.
That’s why our retirement plans are on a spreadsheet—showing you exactly how much money you can spend every month and every year up to age 100. Your income taxes are accounted for, your RMDs, your Social Security, inflation, cost of living adjustments, emergency fund—all of it.
We start by calculating how much you need to continue your standard of living. What does your budget look like? Most people think it’s whatever they’re earning right now. No, it’s not. Typically, when you retire, you will spend more money at first, because with more time on your hands, you’ll find more things to spend money on and enjoy. We go ahead and plan for that.
We do a Social Security boost report that not only accounts for Social Security’s standalone optimization with the 567 different ways you could file, but we do the math to see how Social Security correlates with your pensions, your rental income, your tax-deferred accounts, and other income streams you have and we organize all of it such that it maximizes your total long-term Social Security benefits (by mitigating taxes, for one thing) far more than if we had just optimized it independently.
Our planning process uses guaranteed accounts for income along with bidimensional market algorithms for any money you have at risk in the market. These algorithms tell you what to buy, when to buy, and when to sell. They’re built to keep up with the S&P in the up years and protect your assets in the down years. Our proprietary bidimensional growth models helped our clients miss the recent stock market drop in Q4 of 2018. Our clients were able not only to just sail through it but able to make money when a lot of people lost around 20%+, which is a devastating hit to people’s retirement savings.
Because we are fee-based, retirement fiduciaries don’t make commission on trades. We have no conflicts of interest; we are legally bound to put your best interests above ours. Everything is transparent and spelled out—we only succeed when you succeed.
We can’t stress enough that you’re compromising your gains and accentuating your losses by drawing income from a fluctuating account.
And that’s the beauty of it. Our retirement plans are designed to be simple for people to understand. That is the kind of transparency that folks need to answer, “Am I going to be able to maintain my standard of living when I enter retirement?” When we look at your spreadsheet we will see when you can retire, and if it’s now, then we can start to plan your vacations, your bucket list items or maybe some extravagant family reunion.
We’ve built your plan in such a way that sequence of return risk or drawing income from a fluctuating account is gone. We’ve built it in such a way that inflation whether it goes up or down can benefit you. We’ve built it so all these different risks that you may or may not be accounting for is able to give you stability and ultimately a safer retirement so you can focus on what matters most.
A Safer Approach to Retirement at Decker Retirement Planning
Here are four things we recommend:
- Work with a retirement fiduciary—even if it’s not us.
- Use principal guaranteed accounts to fund your expenses for at least the first 20 years of retirement, then as that 20-year mark approaches, re-distribute and create a new set of principal-guaranteed accounts to fund the next 20 years. Include inflation factors and income taxes in your plan, because they can drastically erode what you actually have to spend.
- Weight the plan heavier toward the beginning, when you have the health and energy to travel and do your bucket-list activities. Be sure to plan for health care costs later, and a plan for long-term care if you need it—without wasting money on it if you don’t end up needing it.
- For money you keep in the market to fund the second or final 20-year time span, or plan to pass on to heirs, use a bi-dimensional growth strategy designed to make money in both up and down stock market conditions.
Enjoying Your Retirement
We’d like to tell you a story so you can better understand what we’re talking about. At Decker Retirement Planning, we have a client who is a brilliant man, and very knowledgeable about the stock market, too. His profession before he retired had been medicine, but he was very proficient at investing—he was much more aware of markets than your average person. Yet, when he first retired, he spent almost every morning in front of his computer stressing about the markets.
Was he making the right trades? Was he not making the right trades? Was he losing money?
Can you see yourself in this situation? Does this sound like the retirement you want?
In his case, he had said his desire was to enjoy his summer home and his winter home—he had both. He wanted to spend time with his family. He wanted to take one or two vacations every year, and spend more time enjoying the hobbies that he had been putting off for years.
When we finished the retirement planning process with him, his wife sent us a card. In it, she said, “Thank you so much, I got my husband back.” Why? Because they were able to actually start their retirement, doing the activities they wanted to do together, instead him sitting in front of the computer all day long.
Why stop working 40-60 hours a week just to make it your new job in retirement to monitor the markets?
Depression is based on your past, while anxiety is a stress based on what could happen in the future. Let’s do everything possible to get rid of that stress from the future.