Destinations

Most families that take summer trips wouldn’t dream of setting out without a destination in mind, but the same people will work and save for retirement for decades without even a vague set of goals. How then does one set a goal for retirement savings, and develop a plan against which to measure one’s progress?

Certified Financial Planners have long used a rule of thumb that one should plan to withdraw 4% of their retirement savings per year to have a sufficiently low (10%) chance of running out of money during an average 30 year retirement, reasoning that post-retirement investment will return about 7% and inflation will average perhaps 3%.

But, we’ve had abnormally low stock market returns over the past 10 years – low enough to throw a wrench in such a plan. Plus, I may wish to be retired longer than the typical 30 or so years, and may travel or pursue other hobbies that make yearly expenses somewhat greater than expenses during my working years rather than the 70-80% of pre-retirement income typically estimated by financial planners. I therefore wish to save more aggressively than this 4% rule dictates, enabling both a higher standard of living in retirement and the ability to weather potential volatility of post-retirement investments while seeking a rate of return higher than 7%.

Using a hypothetical yearly income of $100,000, the 4% rule suggests a retirement savings of $2.5M to retire. My goal is to surpass this percentage by a safe margin, using a fairly aggressive investment portfolio illustrated by the model portfolio associated with this blog.

Note I use fictional, round numbers for purposes of this example, which is not likely to directly mirror anyone’s exact situation. I’m 40, but my income and savings have been arbitrarily selected as $100,000 and $500,000 – a ratio more typical of an active saver nearing 50. It is my goal to bring that hypothetical $500,000 savings to an amount exceeding $2.5M, or multiply it by another five times before retirement in 10-15 years.

Next, how to get from here to there…