Chances are, our biggest fear as we approach or retire can be expressed in 8 simple words: “Will I run out of money when I retire?” I can see the wrinkled nose and sweaty palms starting to show as stress levels rise after someone asks that question. Also, it’s not an easy quantifiable answer. It’s best approached as “it depends” as it depends on various moving parts such as interest rates, inflation, withdrawals, etc. that muddies the waters of income and savings.

As a Retirement Counselor, I have to sit down, take a deep breath, and then start outlining the events and circumstances that “could” result in a shortfall in money during your retirement. In this article, I’ll explain some of these, along with some ‘pitfalls’ and ‘bumps’ to watch out for on the road to (and into) retirement.

First, “running out of money in retirement” needs a proper definition. Do you mean bring your investments and savings plans to zero? Or does it mean running out of REVENUE that those investments can produce? Or is the better question still, “will my current lifestyle be reduced for years to come by my investment choices today,” or “how can my current plan for living in retirement be reworked to increase my chances of not staying no money” You need to be specific with your question to allow your advisor to give you a more specific answer based on the rules and historical results.

Once your question is precisely framed, you need to consider what you feel comfortable doing. What is your experience, temperament and level of willing risk? follow me here If you’re a saver and you like bonds and CDs, and you think stocks are risky, then say so. If your retirement plan owned mutual funds and they worked, then you can take some risk from owning stock-based investments. Where I find most investors get sidetracked is when they do things that really go against their nature or experience, and allow emotions to color their thinking. Also, they don’t think about things in terms of money or they think too much and change their strategy too often for any company to have a chance of success. Let’s look at some numbers and options that might help you with your retirement planning.

Consider a retirement portfolio (IRA, brokerage account, etc.) that contains $50,000 in bonds and $50,000 in stocks. The shares are of high quality and pay dividends equivalent to 2% per year. The bond portion pays 5% in interest income. That’s $1,000 in stock dividends plus $2,500 in bond dividends, for an income of $3,500 per year. Nothing bad; that’s close to $300/month in revenue. If bonds and stocks continue to pay, then it’s fairly certain that your income will stay level, or even increase over time as corporations increase their dividends if business goes well.

appreciation vs. Earnings: I think investors are wrong when they confuse ‘appreciation’ with ‘earnings’. Appreciation is the increase in the value of a stock, bond, or mutual fund. Income is the earning of dividends or interest from a stock, bond, or mutual fund. From my example, what could happen that could derail your efforts and lead you to run out of money prematurely? Answer: Spend more than you earn.

Suppose your stock value goes up 25%, to $62,500, and the bonuses stay at $50,000. Now you have $112,500 total, right? You may think: OK, now I will take $1,000 more from my account every year since I made some money on my stocks, now take $4,500 or $375 per month. Whoa there big spender! Where do you get the extra $1,000? You have to sell some stocks or bonds to get it. You are now spending your principal, since your dividends and interest are still $3,500 per year. Spending more than your portfolio earns is spending your capital. For every $1,000 of stock you sell, you are reducing your future income by $20/year (2% of $1,000 and $50/year for every $1,000 of bonds sold). It’s emotionally warm to think that way in a bull market, but what about when the 25% bear
market hits (we just had one) and your account is now down to $87,500 ($50,000 in bonds + $37,500 in stocks). Derail your #1 retirement rut: You’ll never run out of equity if you don’t spend at all. Rule 1a: If you decide to spend capital in good times, be prepared to stop spending capital in bad times. Remember: dividend and interest income are fairly stable. Stock and bond appreciation is not stable and cannot be relied upon year after year. Better idea: When stocks go up, move some of that appreciation (gain) into bonds; now you will get more income: 5% of the bonuses vs. 2% for shares.

Taxes and Inflation: The second really important area ignored by most investors and mutual funds is the effects of inflation and taxes on your retirement money. It’s what you keep that counts. We all hate taxes and the damn tax code is changed so often by Congress that hardly anyone can keep up. Inflation is a bit easier to understand. To simplify the example, let’s say you’re earning 5% on your combined portfolio of stocks and bonds. Removing 15% in taxes, you now earn 4.25%. Now subtract 3% for inflation and you get 1.25%; It’s not a big win now, is it? Fill your retirement pothole #2: Consider inflation and tax impacts when designing your retirement income plan.

Maximum withdrawal rates. Multiple studies have been written on this topic over the last 25 years, and the consensus is that a 4% to 4.5% withdrawal rate would prevent you from running out of money over a 30-year withdrawal period using 50% stock/50% equity. bonds. This plan does not consider primary vs. input as above. Take the initial value of your account and withdraw 4 -4.50% year after year. Another plan I’ve seen put forward is to withdraw the total return on your portfolio (appreciation + income) after subtracting the rate of inflation. For example, your portfolio earns 10% for the year (8% appreciation + 2% income); you can withdraw 7% that year. Why? Because if you make 10% and inflation is 3%, then you’re leaving that 3% gain in the portfolio to offset the inflation in the portfolio that you’ll need next year. That would require some mental math on your part, because you would adjust your income each year based on the value of your portfolio and the cost of living (inflation) from the previous year. Where this plan could fail is when your portfolio loses money, like last year, so no withdrawals would be taken. Can you put your retirement income on hold and wait for better times? Probably not. Fill your retirement pothole #3: Be flexible; make more than one plan for your retirement income, using more than one portfolio or investment.

Finally, remember: today I used an example of a 50%-50% portfolio mix. You may own other investments that secure your income, such as a pension, social security, or an income annuity. The more secure the collateral, the more options you generally have with your remaining investments.