You don’t have to be wealthy to retire well — here’s how

Retirement


By Paul A. Merriman

Every dollar matters. Every decision matters.

Arguably, the best time to retire is after you’ve saved more money than you need.

But it’s not possible for everyone. Today, I’ll show you how to retire even if you don’t necessarily have enough savings as you’d like.

This is Part 5 of a series of articles I’m thinking of as Boot Camp 2023 for Investors.

   --      The first installment was The best way to invest for retirement. 
   --      The second was Seven simple portfolios that have beaten the S&P 500 for more than 50 years. 
   --      The third was How to control your investment losses. 

— Fourth, how to turn small money into big money later and why you should invest beyond the S&P 500

The main focus today is how you plan to withdraw your money. This includes balancing how you invest, the lifestyle you adopt, and how much money you take out each year. Every dollar matters. Every decision matters.

Your first priority should be to make sure you don’t run out of money before the end of your life. You don’t know how long you can live, so assume that you will live to a ripe old age.

In short, you need a plan.

For this discussion, we will assume that you need to withdraw a fixed amount in your first year of retirement and then increase that amount each year to match actual inflation.

I don’t know how much you’ll need for the year after retirement, but it’s possible to discuss it in terms of percentages.

Financial planners often recommend withdrawing 3% to 5% of the value of your portfolio annually. If you can meet your needs by deducting 3%, you are unlikely to run out of money.

Based on history, a 4% dropout rate is probably sustainable. However, if you need to withdraw 5% each year and adjust for inflation, your portfolio may not last very long.

Over the years, I have published and updated a series of tables showing hypothetical yearly results (starting in 1970) from various portfolios and withdrawal rates.

You can use these tables to see how much money you should plan to withdraw from your portfolio each year.

When planning the distribution of retirement benefits, there are two main variables that can be controlled.

   --      What percent you'll take out each year; 
   --      How your portfolio is invested. 

First, open the link above and scroll down to Table D1.5 on page 3. There are 10 columns showing the yearly values ​​of portfolios for various combinations of fixed income funds and the S&P 500.

This table assumes that you withdrew $50,000 (5% of your portfolio) in 1970 and then adjusted that amount annually for actual inflation.

Scroll down and you’ll quickly see that since the early 1990s these portfolios have been unable to keep up with the growing demand for withdrawals each year.

Now look at Table D1.4, which is based on withdrawing $40,000 instead of $50,000 in the first year of retirement.

With a withdrawal rate this low, your money could easily last for far more years than most people spend in retirement.

Table D1.3 shows the effect of a 3% withdrawal (we never got close to running out of funds). Table D1.6, on the other hand, shows a 6% withdrawal (funds exhausted in less than 20 years).

Luckily, you are not limited to these options. As I said earlier, the investment destination you choose makes a big difference.

First, of course, there is a delicate balance between equities, which should help your portfolio grow over the long term, and bond funds, which should contribute to your sense of security.

Then, as you scroll further down the table, diversifying stocks beyond the S&P 500 can have very different results. By the way, this is what I highly recommend.

Tables D9.3 through D9.6 show results using four popular US fund strategies. This includes splitting stocks into equal parts for the S&P 500, large cap value, small cap mixed and small cap stocks.

For example, Table D9.5 shows that this combination supports 5% withdrawals over 40 years of retirement, as long as you keep at least 30% of your funds in stocks.

When stocks were confined to the S&P 500, no combination came close.

Other tables show results for stock combinations that in some cases far outperform the S&P 500.

If 40 years of retirement were the norm, using a US small-cap value fund instead of the S&P 500 could have achieved it and paid a significantly higher dividend (Tables D12.5 and Scroll down to D12.6). .

Future returns will not be the same as from 1970 to 2022, but the relative strengths and weaknesses of these portfolios are likely to hold.

There are two important points to remember.

— Regardless of the size of your portfolio, consider diversifying your stocks beyond the S&P 500.

— No matter how much or how little money you have available, if you can live on even a little less than your income, you’ll make a big profit. Creating a cushion to deal with unforeseen needs and certain opportunities will reduce post-retirement stress.

In half a century of helping investors, I’ve come to the conclusion that the single best thing you can do is start your retirement with as much money as possible. A few years ago, in this article, I argued that if he delayed the start of retirement by five years, many could effectively double their retirement income.

Over the years, these tables have helped thousands of investors plan their retirement finances. But if all those numbers are daunting, it might be worth talking to a fiduciary financial advisor who doesn’t have a product to sell. A future article will discuss how to find such advisors.

We recorded a video and another podcast detailing this important step in protecting your future.

In the next article in this series, I’ll show you how to spend more money in retirement without running out of money. Of course, only if you have more than the minimum savings to meet your needs.

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are authors of We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement. Get your free copy.

-Paul A. Merriman

This content was created by MarketWatch operated by Dow Jones & Company. MarketWatch is published independently of The Dow Jones Newswire and The Wall Street Journal.

 

(Closed) Dow Jones Correspondence

05/13/23 1612ET

Copyright (c) 2023 Dow Jones & Company, Inc.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *