More Thoughts on the Magic Retirement Number
August 26, 2010 by MJP
Filed under Planning Tools
The retirement planning establishment seems to be making a slow shift away from “the number” as a primary goal or target for baby boomers and other prospective retirees. Instead, greater emphasis is being placed on retirement income as a primary planning goal. I think most of this shift is occurring because the so-called 4% withdrawal rate rule has been exposed as flawed and potentially dangerous.
I have written about the 4% rule in the past. It is based in large part on statistical analysis of historical market returns and asset allocation theory. Then we had a “Black Swan” event in 2008-2009 where correlations converged on 1:1, meaning that every asset category- stocks, bonds, real estate, commodities, etc. fell at once. Even some money market funds “broke the buck.” No 4% rule can survive such an event. Moreover, we can’t assume that the recent Black Swan event is over and/or will not recur in our retirement lifetime.
As further evidence of the refocus on income planning instead of the “number”, have a read of this recent article from CNN/Money: Retirement: Whats your magic number?
Note the reference in the article to “wealth illusion” whereby individuals tend to overestimate the amount of sustained retirement income they can expect to derive from a pile of money.
The article also mentions Putnam’s new “Lifetime Income Analysis Tool.” I have not tried this tool, as it is apparently available only to Putnam customers or at least serious prospects. There is also a link to the T.Rowe Price Retirement Income Calculator which is available online to anyone. I tried it and found its output useful. The problem is that it doesn’t adequately explain the assumptions that are used.
In general, I am pleased to see this increased emphasis on income over the magic retirement number. As I have in the past, I encourage you to run a theoretical retirement spending budget of your own as a first planning step.
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“No 4% rule can survive such an event.”
I don’t know, my parents kept on taking withdrawals at their predetermined 4% rule rate… and they’re fine, since the market came back.
My focus has always been on income over net worth. You can’t eat net worth, or at least you would starve while you were waiting to convert it into something you could spend at the grocery store. A steady and predictable income derived from multiple sources is your best protection.
Sheltered income from real estate is still the best income to my way of thinking. Smart leverage and conservative assumptions will also get you to retirement a lot faster. I don’t think you can rely on Wall Street to “help” you achieve your objective.