By Byron Moore, posted April 24, 2017
Originally published in the News Star and the Shreveport Times on Sunday, April 23, 2017.
Q: By my estimate I’ll have nearly $1,500,000 saved by the time I retire in twelve years. Is that enough to retire on?
A: Remind me…where in Monroe is the state capital located?
Sometimes a perfectly good question can be completely messed up by faulty assumptions.
Like, “Who was the greatest home run hitter in the history of football?” Or, “What fruit grows best in this area, broccoli or cabbage?”
Retirement planning is a relatively new thing. A hundred years ago, life expectancy for males was not even 50. Today, men that reach age 65 can count on living an additional 17 years on average. It’s about 20 for women.
By the end of the second world war, larger employers offered pensions to retiring workers. These monthly “income for life” guarantees were great for retirees and not too expensive for employers. Retirees didn’t live long back then.
By the time leisure suits had come and gone, life expectancies began to soar, retirees were living longer and corporate America was finding that funding pension plans was getting downright costly.
Enter the 401K plan. Originally conceived as a way to supplement retirement income, corporate America quickly adopted it as its sole retirement option for employees, thus shifting the financial burden of retirement from their balance sheets to retirees’ pocket books.
If I asked you, “How much is your Social Security worth?” any answer other than “I have no idea!” would probably be answered in a monthly income amount. “$1,500 per month,” for example.
But if I ask you what your 401K is worth, you’ll answer me in a lump sum figure, such as the one you quoted in your question. “$1,500,000.”
But you can’t live on a lump sum. Well, you can, but it’ll be short life. Somehow, you’ve got to translate that into a monthly income figure. And until you actually try to do that, you won’t realize how difficult it really is to do.
You could just take your lump sum and simply begin spending it. But do you know how long it will last? Will you run out of money before you run out of time?
Or you can put it in the bank and just spend the interest. Do that math and you’ll see you won’t be doing much of anything in retirement on that plan.
You can try to invest it and just live off what it makes each year. That’s the plan many are attempting to do these days…mostly for lack of any other coherent option. But again, that’s one of those things that looks easy to do on paper (or read in a book), but when it comes to accomplishing that task in real life….well, reality sets in.
One well known financial personality suggests, “You’re going to keep your nest egg invested and averaging 12% growth. We’re estimating inflation at 4%. So, to maintain your nest egg and break even with inflation, you will live on 8% income from your nest egg.”
If the stock market did grow at 12% per year (each and every year) you could withdraw 8% annually and be just fine. Unfortunately for all of us here in the real world, that’s not the way life happens.
The long-term average is not as important as your personal year to year experience. If you happen to withdraw money from your account at a time the market is down, the money you spend can’t “come back.” It’s gone. And so may be your account if you overspend from your account.
These days there isn’t a single “do this and you’ll be fine” solution to the issue of retirement income. A customized combination of solutions is usually what is called for.
But it starts with answering the question, “How much income do I want when I retire?”
Our state capital is in Baton Rouge. Home runs are hit in baseball. Broccoli and cabbage are vegetables.
And retirement readiness is measured in incomes, not lump sums.
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