This is the best way to start your retirement


I am often asked if I can afford to retire. The question looks easy, but it can be difficult.

One simple answer is, “It depends on how much you need to invest each year and how much your portfolio is worth.”

A better answer is this. The best time to start retirement is when you have saved more money than you think you will need in the future. I once described the situation as “the ultimate in retirement luxury.”

This is Part 6 of a series of articles I’m thinking of as Boot Camp 2023 for Investors.

・The first was “The best investment method after retirement”.

· The second is seven simple portfolios that have outperformed the S&P 500 for over 50 years.

・The third method is to control investment losses.

· Fourth, how to turn a small amount of money into a huge amount later, and why you should invest beyond the S&P 500.

· The fifth was “how to retire well even if you are not rich”.

Years ago, I argued in this article that many people could effectively double their retirement income by delaying their first year of retirement by five years.

Let’s assume you need $40,000 a year from your portfolio in addition to Social Security and other sources of income, and you’re likely to feel cramped with less.

If you have $1 million, your annual withdrawal rate will be 4%. As we saw last time in How to Retire Without Being Wealthy, history shows that with these facts, you have a good chance of success.

But if you have $1 million or more in savings, you’ll feel more secure because you’ll be able to spend more money and leave more money for your heirs.

Saving more than absolutely necessary gives you the flexibility to distribute a percentage of your portfolio value each year. If the investment goes well, I will withdraw some more funds. When the market is unfriendly, you can tighten your belts a bit without feeling like you’re giving up your essentials.

Depending on how much “extra” savings you have, you may be able to safely withdraw 5% or more each year.

If you go to my foundation’s website at this link, you’ll find a series of tables. Each table tracks the year-by-year hypothetical results of a particular investment portfolio from 1970 to 2022, based on a particular withdrawal rate.

Let’s look at some scenarios to see how some portfolios hold up.

First, scroll down to Table E1.4 and you will see three columns under the heading “60% S&P 500 Fund / 40% US Bonds”.

These columns assume 60% of the portfolio is in the S&P 500 SPX.
Let’s say the remaining 40% is a bond fund and you started out with $1 million in retirement and borrowed $40,000 in your first year. Each year thereafter, he withdrew his 4% of the final balance of the portfolio from the previous year.

The bottom line: As your investment grows, so does your annual “salary.”

In this scenario, less than $40,000 was available in 1975, when the stock market was particularly unproductive. But after that I withdrew over $40,000 every year.

If you started your retirement with $1.5 million instead of $1 million, you could multiply each withdrawal amount by 1.5. So in 1975 he would withdraw $54,414.

This is one example of why starting your retirement life with more money can make a big difference.

These numbers assume all stocks are in the S&P 500.

One relatively easy way to accumulate “more” is to diversify beyond the popular S&P 500. Let me give you some examples.

One of the better alternatives is a four-fund combination that is evenly split between the S&P 500, large cap value, small cap blend, and small cap value.

Follow the link above and scroll down to Table E9.4 to see how the combination has worked since 1970. It shows the same information as the table we saw earlier.

Tracing the same column shows that the 60/40 portfolio significantly exceeded the $40,000 required.

Table E9.5 shows distributions starting at $50,000. In this scenario, since 1975, it has always been well above the $40,000 required.

See Table E14.5 for another example of choosing a stock investment. This shows the result of extracting 5% when the stock is split evenly between the S&P 500 and a small US value fund.

This stock composition carries more risk. But you can offset that by reducing your overall risk and continuing to invest in fixed income. This results in a 50/50 ratio of equities to bonds, which we consider to be only moderately risky.

If you scroll down to 1989 in this table, you’ll see that the money available 20 years after retirement increased by 36%. $178,238 versus $128,570 without small-cap value (Table E1.5).

As with almost everything else about investing, there are important trade-offs involved in planning distributions.

· Are you willing and/or able to delay retirement for a few years to build your nest?

· Are you more concerned about your spending power after early retirement, or more about how much you leave for your heirs?

· How long do you think you will last after you retire?

· Are you comfortable with “cutting to the last minute” or do you prefer a wider margin of error?

· Do you want to stay stuck in the S&P 500, or do you want to diversify into other asset classes to increase your retirement spending?

There is no single “right answer” for every situation.

But I am sure of this. You can’t go wrong when you retire with the comfort and security of having ample savings.

For more information, watch my video on this topic or listen to my podcast.

Next time in this series is: How to save money with just two funds for the rest of your life and then retire.

Richard Buck contributed to this article.

Paul Merriman and Richard Bach are authors of “We’re Talking Millions!” 12 easy ways to improve your retirement life. ” Get your free copy.

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