In Retirement, Average Returns Don't Matter Any More

Too many working people keep doing the same thing they have always done when it comes to retirement. They keep checking returns to see how much they can accumulate when it comes time to retire. They want to attain the best average rate of return possible.  But think about how long they keep this up — if they work the average number of years most people do, that’s 40 years! They have grown accustomed to checking returns, writing down year-to-date growth, and so forth.  If they can get a 3 percent return, they want 5 percent.  If they get 5 percent they want 7 percent.  But everything changes when a person actually enters  retirement and is taking money out of their funds to live on.
Consider a retirement fund of $300,000. Let’s say a person we’ll call Mary begins taking money out of this fund, something into which she has been saving for 25 years. If she takes $1,000 a month, she will withdraw $12,000 a year. But in the sixth year, while she still has a balance of $234,520 (which includes $6,520 in interest) the market drops by 5 percent each of three years in a row.  Mary continues to withdraw a level $12,000 each year for those three years, leaving only $171,766 in her fund.  If the market gets back to the average 5 percent growth rate she is used to, Mary will run out of money three years prior to her plan, at year 22, instead of year 25. The point is, when a person retires and is withdrawing a level amount each year, the “average” rate of return doesn’t apply any longer. This will force a retired person to take less, just so they don’t run out of money sooner than they planned.
Now let’s move our attention to the goal of having retirement money last for 25 years and even longer.  What if you live 30 years after retirement and along the way you need hospice or long-term care?  This could drain your money at the same time the market is going against you.  To summarize, a working person cannot keep calculating the average rate of return they think they will have in retirement because unseen forces will change what ultimately will be available in retirement.
Rather than being fixated on checking returns, a wise person who wants to plan a secure, predictable retirement, will need to plan one that includes more than just simple 401(k) or standard market investment vehicles. Retirement gets more secure and more predictable when other options are added, including real estate, precious collectibles, property rental, annuities, permanent life insurance, and so forth.  Simply trusting what your employer is telling you about how to prepare for retirement is foolish. Retirement calculators that can help you see what you need to do so that you will not outlive your money are essential. We have these calculators and the means to help you plan for retirement using spending control, debt payoff, long-term savings, and tax reduction tools. Retirement planning is so much more than just checking returns. It involves getting spending under control NOW, eliminating ALL bad debt within 9 years or less, tripling your retirement savings, and learning how to legally and ethically reduce your tax burden so you can put that saved money to work for you.
Call me to discuss how real retirement planning needs to happen: (801) 292-1099, ext. 2.