Last week, we began updating our financial plan, and I asked you some questions about your personal retirement plan. Did it get you thinking? With over 80% of Americans planning to work at least part time in retirement to supplement their pensions, Social Security and savings, the idea of retiring to something – not from something™ is catching a lot of attention.
I am a huge fan of doing something you are passionate and talented at create income in retirement.
For the last 10 years, I have been telling people that are planning on living off their savings, that the most they should consider pulling from their investments to create income is 4% a year if they would like it to last for at least 30 years.
- This means that if you have $1 million saved at age 65, you would only want to pull $40,000 per year or $3500 per month.
- Well according to David Blanchett, head of retirement research at Morningstar Investment Management, “We have to question that 4% assumption“. He says that withdrawal rate would only give clients a 50% chance of their assets lasting 30 years. A 2.8% annual withdrawal rate is more realistic, he adds.
What this means is that if you have $1 million in assets, you should only be pulling $28,000 per year to make sure it lasts at least 30 years. This is certainly not a millionaire lifestyle!
I am not saying stop saving. By all means, continue to build up not only cash reserves, but start maxing out your 401(k) savings and IRAs. You are going to want to have as much cash as possible, so continue to invest.
The secret to building this type of retirement plan is starting early, so you can take advantage of the “time-value” of money. For example, to save $1 million by age 65 (assuming a very generous 10 percent annual rate of return), take a look at the different amounts you would need to save, depending on how late you started to invest in your savings:
Age Daily Savings Yearly Savings
20 $4.00 $1,460
30 $11.00 $4.015
40 $30.00 $10,950
50 $95.00 $34,675
What do you do if you don’t have “The Gift of Time” on your side? Then I suggest your access “The Gift of Experience“. By the time we are in our 50s, 60 and 70s, we all have amazing wisdom and experience that we can leverage to create income to supplement our retirement income. The key is finding out what we are passionate at and skilled at, and then creating a smart plan to generate income.
So why did I suggest last week was to “find your stuff” and to get organized?
- I want you to pull all your investment statements, pension statements, your social security statements so you can see what you have.
- Once you see what you have, you can work with a financial advisor or a financial calculator to see how much you will have out into the future.
- By doing this, you will be able to see how much you need to earn to create the lifestyle you want.
The key is to start somewhere. See where you stand today based on where you are. Then you can create a strategy. My strategy is to spend my winters living in Costa Rica or Panama where the cost of living is very low, and I can lead my retreats which I love, and have access to high quality health care at a fraction of the cost of what we pay here.
The old paradigm: “Retirement” is when you have enough INCOME and ASSETS so working is optional and retirement is affordable.
The new paradigm: “Retire to Something – Not From Something” by creating lifetime income (preferably passive) doing something you love to supplement your pensions, Social Security and savings.
Next week, let’s talk about different retirement income strategies. In the meantime, try to get a “picture” of what your retirement goals are as well as what the future looks like based on where you are today using all those statements you pulled out this week. Try using the financial calculator above and see what you find out.