The Good News: we're living longer

The WFS 3-Step Process to Financial Freedom in Retirement

The average life expectancy of an adult today is roughly 85 for a man and 88 for a woman.  There is a 94% chance that a husband and wife who retire today will need income from their nest egg past the age of 80 years of age.  A retiree today should plan to be in retirement for 25 to 30 years.  Therefore, how big do we have to build up our nest egg before we retire?  And how can we make it last so that we don’t run out of money too soon?

A 3-Step Solution

What about Risk?

Continue to Invest in Stocks

WFS has a simple 3-step formula for achieving retirement, then making your money last.

To build and grow a retirement nest egg (401k, 403b, IRA), you have to take prudent investment risks with your retirement savings.  That is one theory that is set in stone.  Anyone who tells you different is attempting to rip you off.  There is no such thing as an investment that grows 10% risk free.  Buying CDs at the bank is not investing – it amounts to simply trying to stay even with inflation.  You can’t get ahead that way.  So, consider investing your portfolio fairly aggressively when you are young and becoming a bit more conservative when you get older. 

However, you should always keep some of your portfolio in the stock market.  We recommend maintaining at least 50% in stocks over the long haul to avoid inflation eating away your nest egg (much more than 50% when younger and never less than 50% when older).

The only problem with increasing risk to achieve higher returns is that along with higher expected returns, you also get higher volatility which means that in good years, your portfolio does very well, but in bad ones, it gets hurt more.  That’s why WFS attempts to protect our clients by downgrading risk during recessions (bear markets) and upgrading risk during economic expansions (bull markets) thereby maximizing your long term average portfolio rate of return.

I can retire when I can afford to live off:
my pension (if any) +
social security +
nest egg withdrawals

My nest egg is big enough when I can afford to live while withdrawing < 4% per year

Step 1, Determine when you can retire.

How much will I need to spend in retirement?  Some experts estimate you will need between 50% to 75% of current take-home pay for retirement living.

Using the formula to the left, I can retire when my nest egg is big enough to support my spending needs.

Example: Perhaps you think you will need $5k/month for retirement.  Perhaps you won't have any pension when you retire.  Perhaps the government social security statement says you and your spouse will get $1800/month after age 65.  Therefore, you will need to withdrawal $3,200/month from your nest egg to meet your spending needs.  If you withdraw 4% annually from your nest egg, your nest egg will need to be worth $960,000 when you retire.

Now, you know how big your nest egg needs to be before you retire.

But how long will it take to get that big?

Use the Rule of 72.  The Rule of 72 says that you divide 72 by your expected annual return (say 10%) and the result is the number of years it takes to double your portfolio.  So, if you expect 10% annually, then it will take 7 years for your portfolio to double.  If you expect 12% annually, it will take 6 years for your portfolio to double.  If you expect 16% annually, it will take 4.5 years to double.

Example: You need $960,000 to retire (according to previous spending example).  If your portfolio is currently worth $240,000, then you need it to double twice ($240k to $480k to $960k).  You expect a 16% annual return.  Your money will double every 4.5 years.  You will be able to retire 9 years from today.

However, if your portfolio is currently worth $240,000 and you only achieve a 6% annual return, it will take 12 years for your money to double.  You will be able to retire in 24 years.

If you need 24 years of growth, but you're already 55 years old, perhaps you should consider getting WFS to manage your portfolio.  We'll determine your risk tolerance and maximize your growth.

You know how big your nest egg needs to be.

You know how many years you have until retirement.

RISK PROFILE QUESTION

                 A                B               C              D               E

In the above graph, there are five groups.  Each group represents a sample portfolio, A through E.  Each individual bar within a group represents one year of performance.   

The above five portfolios are depicted showing their annual percentage return over five successive years.  If all of your investments were invested under one of these strategies, which strategy would you prefer?   A is very conservative.  Portfolio E is maximum risk with potential maximum reward.

Still not sure what category you belong in?  Below is a table indicating the approximate expected returns for our various risk portfolios A, B, C, D, E.  Naturally, WFS will take steps to protect you in down years, and these numbers only serve as possibilities and examples, not guarantees.

Example:  Back to our example - your portfolio is currently worth $240k and you need to retire in about 9 years (you are 55 today).  You need to achieve approximately a 16% annual return to achieve your retirement goal.

Using the above chart, given that the "average" stock market return is roughly 10-11% annually, you read across the chart until you find 16%.  The best category of risk for you is "D" because during "average" stock market years, a "D" portfolio will typically achieve 14% to 20% returns.

How long will your nest egg last if you withdraw 4% annually?

FOREVER !!!

The chart says so ->

Don't forget inflation.

Detailed Example:

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Retire with WFS taking care of your portfolio.

Let WFS MAXIMIZE your returns.

MAXIMIZED returns will minimize the time before you retire.

Click here and try our new Retirement Calculator now.

Step 3,  After retirement, withdraw 4% annually.

The following chart (based on historical records) indicates that when retired, to keep your money growing over the long haul, you should allocate at least 50% or more to stocks (the rest to more conservative investments like bonds) and limit your withdrawals to under 5% annually (4% keeps your money growing forever - you never run out). 

In addition to keeping withdrawals to 4% annually, there are a few other steps you can take to build a bigger nest egg and keep it growing longer.

1. Wait a little longer to retire.
2. Plan to work part-time after you retire or take a lower paying, less stressful job.
3. After you retire, don’t make the mistake of spending your money too quickly.

When estimating retirement income needs, remember, at 3% inflation, if something costs $1 today, it will cost $2 in 24 years (I used the Rule of 72 to come up with that figure:  72/3% = 24 years before costs double).  So, if you are 40 years old today, figure that the cost of living will double by the time you retire.  

Detailed Example:

a.    John is 53 and needs about $60k/year (in today’s dollars) to live reasonably comfortably in retirement (assuming his mortgage is paid off by retirement age).

b.    John has about 12 years to retirement and inflation averages 3% so costs will go up by about 33% and John will need $85k/year when he retires.

c.     John's recent Social Security statement says he will get $25k/year from social security.  So, John will need $60k/year ($85k - $25k = $60k) from his nest egg.  $60k is 4% of a $1.5million nest egg

d.    John has $250k saved today (age 53) and is a B+ level Risk tolerance.

e.     If WFS is managing his portfolio, he can reasonably expect an long-term average 9-14% annual return on his portfolio prior to retirement (not guaranteed) because the historical stock market average return is just over 10%.  We’ll use a 12% return for round number purposes.

f.      At 12% John’s portfolio will double every 6 years.  So, when John is 59 he will have $500k.  When John is 65 he will have $1million. 

g.    John will not make it!  He needs his portfolio to grow to $1.5million, yet at a B+ risk level, it will only grow to $1million by age 65.  He can either wait until he's almost 70 to retire, or he can adjust his Risk Tolerance to hopefully get greater nest egg growth.

h. If John adjusts his Risk Tolerance to a "D" level, he can reasonably expect a 16% return (assuming "average" stock market years).  His portfolio would double every 4.5 years.  By 57.5 years of age, his portfolio would be worth $500k.  By 62, his portfolio would be worth $1million.  By 65, his portfolio would be worth $1.5 million.

Your money will last.

Make an appointment with Warren Financial to be sure you are on track.  We will utilize the 3 Steps to Financial Freedom and a Prosperous Retirement to help you understand what you need for retirement, how to get there, and how to make it last!  Call WFS today 610-363-2000 or send us Email: Warren Financial and visit our website: www.WarrenFinancial.net

Note: this information is based on historical facts and realistic rules of thumb.  No one can accurately predict the future, nor predict future values of the stock market, however, although these assumptions are not guaranteed, they are reasonable based on past history.

WFS strives to be a good neighbor.  The kind of neighbor who is always helpful and courteous.  We are a Christian company with the goal of helping our fellow man.

Note: This information is not an offer or solicitation to buy or sell securities, nor a recommendation of any particular security.

Note: This information should only be considered in the context of all local, state, and federal laws, including securities laws, and applicable only where allowed by those laws, and otherwise ignored

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