The Retirement Nightmare Solution

I was talking to my daughter the other day and she said “Daddy you aren’t afraid of anything are you ?”  it was half question and half statement as she is 9 and still at that age when daddy can do anything. Not wanting to disappoint her I said of course not sweetheart a daddy’s job is to be brave and look after his kids. But I’m ashamed to say……. I sort of lied, because, when I thought about it I realized there was something I was afraid of, terrified in fact.  And quite frankly I think it’s something you should be afraid of too.

My fear, the one that keeps me up at night is.

Not having enough money to comfortably live out my retirement without having to watch my pennies or resort to eating cat or dog food. OK I made the last part up but you get my point. For me retirement is a long, long way off as I’m only 48 this year and closer to 18 in my head  and I love what I do and don’t plan on retiring ever! But I went and found a retirement calculator and entered in my details as in how much I have now, how much I want to take out monthly when I retire and what age I want to retire. I chose 65 because I know a lot of people hate their jobs and can’t wait to leave and that seemed like a fair number for this experiment. May aim here was to find out how much I would need to contribute on a monthly basis so that I could live on $150,000 a year of income starting with a nest egg of $200,000. I figured a starting amount larger than this would not give a true representation of what’s required to reach the goal.

So, here are the results of this particular calculator.

Firstly I would need to contribute $8,664.87 for the next 216 months which meant I would need to contribute an additional $1,871,611.92 (yes that’s right over 1.8 million) which is considerably more than most people actually earn in an entire lifetime. On top of this I had to take the most aggressive investment strategy this particular calculator had to offer to average 8% a year or better. Then I had to be willing to risk a maximum loss of 40% and if all went according to plan and I avoided well……..any losses at all then by the time I was 65 I would have $5,000,000. Besides which 216 months amounts to 18 years and its crazy to think that there won’t be a single negative year in the stock market during this time. But hang on a minute what if on the very last month I had that 40% hit? That would mean I would be left with $3,000,000 which is nothing to sneeze at granted, but a far cry from what I had. Besides as its human nature to value a loss and feel that pain much more than we enjoy the gain. It may actually be hard to bounce back from that kind of loss. Now you may be wondering why I would need to save a staggering $5,000,000 if I wanted an annual income of $150,000. The main reason is that we are likely to live longer than we anticipate and to guard against running out of money the conventional wisdom is to spend no more than 3% of your assets from the previous year. In fact, in a recent Wall Street Journal article say that if you went as far 4% you ran the risk of running out of money or having to reduce your life style considerably…..ouch! So, assuming I managed to save all this money and am now sitting on a $5,000,000 nest egg I can then park it in the bank at around half a percent assuming I find a bank that will pay that. But I take my 3% out first so I don’t need to lock that up for the year.  So, after year one I have made $24,250 in interest on $4,850,000.  This means that  at the end of year one I have a total of $4,874,250 and I can take out 3% of this which is $146,227.50. So now it’s only taken a year and I am already making less than the $150,000 a year I budgeted for, scrimped and saved and went without for. So, I take out my $146,227.50 and lock the remaining $4,728,022.50 in for another year at half a percent and earn $23,640.11 in interest. Now at the end of year 2 I have $4,751,662.61 and I can take out $142,549.87. So by the end of the 3rd year I am withdrawing $7,450.13 less than I could in year one and there have been no taxes or fees taken out. Now, can you see why this literally scares the S**t out of me because I have to save so much and go without so much as I try to add $8,664.87 each month for the next 18 years. Then I need to pray that there I never  ever have a down month and heaven forbid that potential 40% drop.  Just so that I can make my target of $150,000 annual income during retirement…… once? Now people that know me know I am not the sharpest tool in the shed but even I can see this doesn’t work……………or if it did its maybe not worth the risks.

But what if????

You could take the scenario described above and get better results starting with the same $200,000.
  • Average an annualized return of 8.1%
  • Avoid the risk of the 40% drop.
  • Eliminate the potential of a negative month
  • Add $1,003.03 a month instead of $8,664.87
  • Reducing the monthly outlay by $7,661.84
  • Achieve the targeted $150,000 a year
  • Without ever eating into the principal.

How??

By simply changing the investment strategy from one of being fully invested in the market to being invested in FTM Class A which has averaged 8.82% since inception and never had a negative month. Then instead of attempting to grow the nest egg to $5,000,000, growing it to only $1,500,000. Once that had been reached switching to FTM Class D+ which pays a simple interest dividend of 10% a year with interest paid quarterly. So, the investor would receive $37,500 each quarter and at the end of the year still have $1,500,000. Taking the example from above instead of receiving less and less each year the $150,000 remains constant no matter how long you live and the principal remains unchanged. Oh and if you substituted FTM Class C for FTM class A you raise the compound annual return to 10.58% and then your monthly contributions drop to $261.85 a month. Now this is nothing more than a thought experiment in thinking outside the box but it certainly illustrates what is possible using the power of compound interest and avoiding losses. But perhaps the most important take away from this is that the earlier you start the less you will need to contribute. And yes, I know when we are young our plan is to live forever because we are pretty much invincible but the reality is it doesn’t work that way. If you started at 30 with $20,000 then you would only need to add $124.67 a month to reach the $1,500,000 mark by age 65. Anyway this is my own personal opinion and not meant as an endorsement of FTM or financial advice but I wanted to show you how a little out of the box thinking can potentially make a massive difference to your financial future.  

Article by Endre Dobozy

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