Dave Kennon, Kennon Financial
If you are afraid of outliving your money in retirement, be comforted by the fact that you are not alone. A study from Allianz Life reveals that Baby Boomers fear outliving their money more than death.
61% of the survey respondents responded that outliving their money was the number one fear in their lives. Dying came in a distant second at 31%.
I get it. The idea of running out of money can be terrifying. Many Boomer’s imagine themselves homeless, sleeping on friend’s couches. Begging their children for a little spending cash. Living in poverty during their golden years.
This is why The Retirement Revolution started in the first place. Retirees are rejecting this fear-based worldview and replacing it with a sense of empowerment and opportunity. All it takes is some education, the clearing up of some common misconceptions, and getting your money working for you in a suitable manner.
Remember, only 12% of retirees reach the end of their life with only social security remaining. Don’t let the doom and gloom of the media tell you otherwise.
I had a great question from a reader recently:
“I’m always reading about your 5% rule to withdraw from your portfolio once you retire. However, I don’t understand whether it’s only if your annual return was 5% or to withdraw 5% whether your return was 1%, 2% or even -10%? Would you please clarify this?”
Many of you are already withdrawing your retirement income from your portfolios, and for some, it can be disconcerting to withdraw money when their account appears to be temporarily going down.
First of all, this is a perfectly normal human reaction. You are pegging your financial security in retirement to financial instruments that seem unpredictable and a little scary.
Two important points:
Remember that, in general, people do not have all of their money invested in stocks when they retire. Many income-oriented portfolios for retirees contain 30-50% bonds.
Most of the time, when stocks go down, bonds go up. This is mainly due to investors reacting out of fear, and moving money from stocks into bonds (don’t do this).
Sometimes people ask, “Dave, you keep telling us to ‘spend the money that the money is making.’ How is that possible when my account is going down?”
It’s actually very simple. When the stock market goes down you temporarily take your monthly income checks from the bond portion of the portfolio. Once the stock portion of the portfolio recovers (be it one month or one year), you start taking your monthly check from the stock portion.
So in a sense, you ARE always taking the money that the money is making. Doing this is possible even if stocks are temporarily down.
Let’s look at the last eleven years of returns for someone with a 50/50 portfolio of stocks and bonds. I’m including 2008 so you can see how quickly your portfolio would have recovered. Remember, 2008 was the worst recession since the Great Depression.
2018 -5% Year-To-Date as of yesterday (12/17/18)
In regards to the original question: do you always take 5% from your portfolio or only if your account returns 5%?
Answer: You always take out the 5%. Do you take out 12% if it makes 12%? No, you still take out 5%. Looking at the past 80 years of economic history, 5% is a relatively conservative return assumption. In the past 11 years, this example portfolio returned an average of 6.1%.
If you take out 2008, in the past ten years, the average return was 8.5%.
**Don’t let your friends and family live scared, all the while over saving and under living. Please forward this email to the people in your life that need to hear this. The Retirement Revolution needs you!
Dave Kennon, Kennon Financial
There is no certainty that any investment strategy will be profitable or successful in achieving your investment objectives. An index is a portfolio of specific securities. Indexes are unmanaged and investors cannot invest directly in an index. Index returns are “total returns” with dividends reinvested, which means the return is not only the change in price for securities but any income generated by those securities. The performance of an unmanaged index is not indicative of the performance of any particular investment. Investments offering the potential for a higher rate of return also involve a higher degree of risk. Past performance is no guarantee of future results. Actual results will vary.