You may have heard investors talk about “the rule of 72.” It sounds mysterious, but it’s really just a simple mathematical equation that can help you calculate returns by estimating how many years it will take for you to double your money at a given annual rate of return.
Recently on my radio show, I ran a segment on “your magic number,” which is the amount of money I suggest you have to plan for a comfortable retirement. Many people haven’t reached their magic numbers yet, so they think they should create a budget; find ways to cut back on expenses so they can begin saving and reach that number. What do I think of that?
I’ve worked with retired clients for over 28 years, and in that time, I’ve noticed a trend in their cost of living as they age. I’d like to share that experience with you, to help you plan for your retirement.
When people plan for their retirement, a typical rule of thumb is to take out 4 percent of their investments for their cost of living (you can learn more about this rule here). But this “rule” is not complete, because you have to account for increases to your cost of living.
The financial community used to talk about the “4 percent rule,” saying that retirees could typically withdraw 4 percent from their investments without running into trouble. Now many advisors have changed that amount from 4 to 2 percent. Why the cutback? Think about the last two bear markets: If retirees had taken out 4 percent during the Y2K and 2008 bear markets, how would they have likely fared? Not well.
Last week, one of my clients said, “I want to open a joint bank account with my daughter. That way, if I become incapacitated or have health issues or other problems, my daughter could step in and start paying my bills; take care of things.” I said, “Sure, you can do that, but let’s talk over the risks first, so you can make an informed decision.”
Last week, three separate clients expressed concern about the future of Social Security. They were worried that they might be means tested, or that benefits might be slashed, or that the entire Social Security program might be cut. Are their worries based in reality? The Social Security program is in trouble. It’s no secret. Even the program’s website (ssa.gov) says, “As a result of changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted. At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future.”
When you invest, you’re in the risk business. You receive returns because you take chances on investments. But I think you can address those risks by knowing your enemy; by recognizing the three main investment risks you face.