Let's Talk Turkey - I mean, Retirement

Nov 29, 2017 | By: Katie Entwit

Talking Turkey:

If you’re like me, you can’t look another bite of turkey in the face. It’s back to business as usual for a few weeks between holidays here. For us, this means the more serious questions come knocking. Let’s address them head-on.

In this line of business we are often met with that confounding question “how much do I need to save for retirement?” This is as difficult to answer as you might imagine. Necessary retirement dollars depend on a great many factors – the average life expectancy of your family members, if you stand to inherit any of Aunt Marge’s estate, the quality of food you like to eat, etc.

There is a rule, however, that could be useful. Behold the 4% Rule, which says that you could, essentially, take out 4% of your retirement account every year and it should last you a while – 33 years, give or take. This works because the stock market, if you’re playing the long-game, has an average return of 7% every year (depending on your mix of stocks and bonds in your portfolio). If we deduct the average inflation rate of approximately 3%, then you should safely be able to take 4% out of your retirement account and not deplete it. As long as you only plan to live another 33 years after retirement. But this doesn’t really answer the question, does it?

Let’s back into a more concrete number in dollars. If you’re going to need $40,000 per year for living expenses from your retirement, this means you need to have $1 million in your retirement account ($40,000/.04 = $1,000,000).

Now here is our pot of disclaimers –

1. While past performance in the stock market isn’t a guarantee of the future, it’s a pretty good indication of what is to come. But still no guarantees.
2. Your stock and bond mix may not result in a 7% average return, but ultimately should reflect how much risk you are able to handle; this may change several times depending on different factors in your life.
3. This 4% rule only works if you don’t take out a big chunk for car replacement, etc., because the compounding effect gets interrupted.
4. Medical inflation is rising higher than normal inflation, so you may need more money than you have planned for, depending on your health.

What about Social Security?

We’re not sure who started the rumor that Social Security is going away, but its longevity is impressive. My parents were told this scary story when they were young; I’ve been hearing it as long as I can remember. The Baby Boomer generation is not going to cripple and deplete the system. In fact, in anticipation of a higher number of retirees to come, Congress upped Social Security taxes in 1983 to prepare for the spike. Social Security has been running at a surplus for many years, and the interest accruing on those funds has been, and will continue to, pay benefits until 2020 when the reserves will begin to be tapped -as planned.

Will Social Security go away? We don’t think so. One guess is that it will become more needs-based so millionaires can’t collect while the less-than-wealthy still can. Having said that, we don’t suggest using Social Security as your main retirement plan. Think of retirement as a many-legged stool. You need at least three legs so you don’t fall over. One of those legs could be Social Security, but you need a few others to keep yourself off the floor.

Our office specializes in wealth management – financial planning, retirement planning, social security planning; it’s our jam. Or our turkey, per-say. Give us a call today to schedule an appointment.