Is Everything We Know About Retirement Planning Wrong?

rogernusbaum

I stumbled across an article at Seeking Alpha titled How To Retire In Ten Years With $1 million. I shared it on Social Media and I jokingly said "have $800,000 now and don't do anything stupid." The article was very long and had a lot of detail. I would warn that the return assumptions seem high and they are definitely linear (assumed to be the same every year) which is obviously not how the real world works. Retirement planning can be as complicated as you want to make it. Whatever you think of the article it is not simple nor concise. I realize that simple and concise doesn't appeal to everybody but whenever I can make something simple, I do and I think a lot of retirement planning can be simple. Social Security and depending on the route you go, health insurance are not simple. There a lot of nuance there that should be understood and getting to a point of understanding may not be that simple.

Other things can be very simple.

How much money do you need? You can spend unlimited time coming up with a number but when it's time to retire (whether it's when you planned on or because your hand is somehow forced), your "number" no longer matters. All that matters in this context is what you wind up with. If your number was $900,000 and you wind up with $750,000 then something will have to give. You'll either have to spend less, keep working or figure out how to create an income stream that will fill the gap.

Whatever you wound up with, 4% is generally the optimal amount to withdraw annually to allow your portfolio to sustain. The odds of sustainability are slightly worse if you take 5%. The odds of sustainability are a little better if you take 3.5%.

Don't obsess over replacing a percentage of your income. The rule of thumb about needing to be able to replace 70% is wildly vague. How much do you net after taxes from your paycheck now? You don't need to save for retirement once you've retired. If you're lucky, your mortgage will be paid off by the time you retire. You might end up with fixed monthly expenses that are very low. You might spend more on travel and things like eating (although here in the middle of the pandemic, who knows?) but those are obviously very discretionary and could be cut or reduced if you're short of your "number."

One other thing that is part of figuring out how much you need is to have some sort of cushion for one-off expenses. This doesn't get talked about enough but things like new tires, veterinary bills and home repairs come along every so often and if you have enough of them it can throw you plan offtrack if you haven't prepared accordingly.

Social Security wants you to know how much you're getting. Create an account at its website, get your amount and then figure out whether you're better off with your benefit or your spousal benefit, same thing for your spouse. If your combined Social Security benefits are slated to be $3000/mo, how does that compare to your expected expenses (plus padding for one-off expenses). If you think expenses plus one-off padding will be $6000/mo then you're half way there with Social Security. For a portfolio to generate $3000/mo at a 4% withdrawal rate you'd need $900,000. If you go through this little exercise with your numbers, where do you stand in relation to your $900,000-equivalence? If you're short then you need to figure something out; spend less, work longer or create another income stream. Creating an income stream is something I've written a lot of posts about and can include rental property, monetizing a hobby or some sort of part time job that is fun for you and there are probably other ideas too to pursue.

So it boils down to a simple equation SS+Portfolio Income+Additional Income Stream. If those don't add up to what you need then something will need to give. Either you spend less, work longer or create another income stream.

Embedded in the idea of figuring out how to create an income stream is flexibility. Key to a successful outcome is the ability to be flexible enough to solve your own problems or even better, prevent them by being forward looking enough. If if you're lucky more often than your not every once in a while something expensive is going to come along and you're going to need to pay for it. If you've not been lucky with this sort of thing then it is even more important to leave a cushion for one-off expenses.

Even if you don't think you need to create an additional income stream you probably should anyway. What if the Social Security program actually has to confront cutting the payout? How is your resiliency to that? Whatever the answer, you will be more resilient with an additional income stream. Flexibility, as well as adaptability, is important in all aspects of life.

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