What's my Retirement Number?

What’s my retirement number?

It’s a catchy title but over-simplified. Is it the answer to the question “How big does my portfolio have to be so I can retire?” or “How much of my portfolio can I withdraw safely in retirement?” These two questions are still too oversimplified. Your unique personal circumstances, not generic formulas, should guide your retirement planning. Start by assuming you’ll need close to 100% of your current income. Subtract from this any pensions, Social Security or other income you’ll receive and the remainder is the “liability” that you need to generate with your investment portfolio.

So, how big does your portfolio need to be? What’s a ‘safe’ drawdown rate? It depends. A rule of thumb from the mid-1990’s is that 4% is a safe number. However, with current bond yields and equity dividend rates what they are, there are a number of scenarios in which you’d run out of money by withdrawing 4% of your starting balance every year.

Another rule of thumb is that a 65-year-old couple could purchase a joint annuity with inflation protection from an insurance company for 26 times their retirement income liability. Note that this also works out to an inflation adjusted income of about 4% per year. But, how sure are you that a systemic crisis won't affect the insurance industry's ability to meet their guarantees for the next 30 -40 years ? What if you want to withdraw a little bit for an emergent need? Hmm, annuities are insurance, not investments; the insurance company keeps your money.

So, we’ve just identified two 4% thumb rules but they both have substantial risks. How do you reduce these risks? Hint: there’s no free lunch.

A Treasury Inflation Protected Security (TIPS) ladder could yield up to 0.5% but, unlike traditional bonds, you’ll also have a capital adjustment equal to the inflation index. In other words, perhaps 2% along with protection of your nominal capital investment. Importantly though, it’s still your money. You can tap into it if necessary.

Many stocks yield dividends. Some S&P 500 index funds currently yield about 1.8%. Domestic high yield equity index funds can be found currently yielding about 2.7% (past performance is no guarantee of future results.) Some MSCI Developed Markets Index funds yield about 2.7%. Of course there’s no capital protection; as well as dividend declines you could lose principal. But even during the great depression, when stock prices fell by 90%, dividends fell by only 50%.

Other factors can change your “liability.” When will you start drawing Social Security? If you can hold out until you turn 70, you’ll maximize your benefit (possibly the best return available anywhere.) However, some people have doubts about Social Security's future. Can you give up some optional expenses when market forces reduce dividend and interest payments? Are you willing and able to take on post-retirement employment? What is your life expectancy? Are you married?

There’s no simple answer for a risk-free retirement. Rather than latching on to a simple (and possibly risky) “what’s my number” answer, most people would be well-served by a strategy tailored to their personal circumstances, risk tolerance, flexibility, life expectancy, and retirement goals.

The numbers above are approximations only for illustration and don’t represent the results of real people. The foregoing isn’t investment or financial planning advice; it’s only food for thought. Don’t make plans or invest money based upon this blog post. If you’d like to discuss how Lyon Park Advisors can help with your personal retirement strategy, please give us a call.

Featured Posts
Recent Posts
Search By Tags
Follow Us
  • Facebook Basic Square
  • Twitter Basic Square
  • Google+ Basic Square

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Lyon Park Advisors, LLC (referred to as "Lyon Park") disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement and suitability for a particular purpose. Lyon Park does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice,  as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall Lyon Park be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if Lyon Park or a Lyon Park authorized representative has been advised of the possibility of such damages. In no event shall Lyon Park Advisors, LLC have any liability to you for damages, losses and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

                                                                                                                         © 2017 - 2019 by Lyon Park Advisors, LLC.