The Financial Survival Guide to Retirement

Retirement Basics

Review

• • • • What are possible alternatives to the 4% Rule?

What are their strengths and weaknesses?

What is the effect of using annuities?

What do you like and why?

How Does Your Strategy Look?

• • Using Retirement Quant, put in your financial data – Include pensions and Social Security Evaluate the results – Do you like the success rate?

• Do you need to improve it? How might you?

• Can you withdraw more?

– What’s your plan if things go badly?

Predicting the Future

• • Prediction is a tough thing What is needed to “predict” whether you have enough money to last your retirement?

– How much money have you saved?

– How much will your savings grow?

– How much do you need to live on?

– How long will you live?

Fundamental Questions

• • • • How much money have you saved?

– Include all your investments – Do not include your home How much will your savings grow?

– For now, assume broad historical return statistics – We’ll cover more in weeks 3 and 4 How much do you need to live on?

– Some advisors suggest 80% of your current income – Safer to assume you’ll need 100% – We’ll introduce ‘rules’ later How long will you live?

– Potentially big problems if guess is too low – Safer to assume something like 99

Which Scenario Results in the Most Money after Six Years?

• Scenario 1 annual returns 15%, 7%, 6%, 3%, -5%, -10% • Scenario 2 annual returns -10%, -5%, 3%, 6%, 7%, 15%

Answer

• They have the same result – Total gain is 14.9% • For accumulation, the order doesn’t matter • In retirement, the order matters a lot!

Why Timing Matters in Retirement

Assume withdraw $40k at the beginning of each year.

Scenario 1 Begin withdraw gain (loss) End

Yr 1

1,000 40 144 1,104

Yr 2

1,104 40 74 1,138

Yr 3

1,138 40 66 1,164

Yr 4

1,164 40 34 1,158

Yr 5

1,158 40 (56) 1,062

Yr 6

1,062 40 (102) 920 -0.1

-0.05

0.03

0.06

0.07

0.15

Scenario 2 Begin withdraw gain (loss) End

Yr 1

1,000 40 (96) 864

Yr 2

864 40 (41) 783

Yr 3

783 40 22 765

Yr 4

765 40 44 769

Yr 5

769 40 51 780

Yr 6

780 40 111 851

Be Conservative

• • There are no do-overs in retirement If something doesn’t go as planned, you have to live with the consequences • Consider the “Sleep at Night Factor” – You don’t want to worry every day about your retirement – You should enjoy your retirement

Forecasting Methods

• • Start with assumptions of savings, income need, and life expectancy Several different ways to model future returns 1. Use past 30 or 35 year periods 2. Use random years from the past 3. Use random returns from statistical distribution

Monte Carlo Simulations

• • • • • • Assume statistical distribution of returns – Need to deal with inflation – Need to handle correlation of returns Each year do a random draw for the returns Simulate each year of a lifetime Simulate many lifetimes Pros – Not tied to what happened in the past – May have rare but possible events Cons – Not all simulations are equally probable

Simulation Warning

• No simulation is a prediction •

No model gives a probability of success

4% Rule

• • • • • The most basic of savings withdrawal rules Withdraw 4% of your saving in the first year Increase your withdrawals by inflation Pros – Easy – Simulations show 80-85% success rates Cons – Too simple

Let’s Get Started

• • Many retirement calculators – Vanguard – T Rowe Price – Fidelity Retirement Quant – Software written by me, originally for me – Used for my retirement financial research

Online Calculator

• • • • T. Rowe Price calculator https://www3.troweprice.com/ric/ricweb/public/ric.

do Assume: – $1M in savings, no pension – $15K/yr from Social Security – Age 60 Try to answer: – Will the money last your lifetime?

– How long might you have to work?

– How much do you need to retire when you want?

Homework

• • • • • What is your income?

Total your investable assets. (Not your home) What are they invested in? By percent.

What is the percent in stocks? Bonds?

What is your average tax rate?