The Market Is Down…have you checked your Monte Carlo projections???
Last month you ran a retirement scenario that showed you had a 85% probability of success. Which left you feeling good because it showed you could retire at your anointed time. Yay for you!
Yesterday you ran the same exact scenario but your probability of success is now only 70% meaning your going to have to work at your crappy, old job for 2 more years. “Nooooooooo!!!!” You scream into the night in pure panic. “I CAN’T do it! I just can’t!” You hate your crappy, old job, after all, and you’re just there until you get to the point where your retirement projections show you’re ‘safe’ to retire.
Suddenly though, in a month’s time, all your hopes and dreams have been shattered. Just. Like. That.
Is it Trump? The Democrats winning the House? NYC banksters? Jeff Bezos? Who is to blame for your retirement plan being derailed? You’ve got to be able to blame someone, but whom???
And this, my friends, is why I despise retirement projections. Literally, for our fictional character above NOTHING HAS CHANGED! The only thing that has happened is that the market is down around 6% since last month. That’s it. Nothing else. Yet, when I run an analysis whereas before this person could retire at 55, now he can’t until 57 if he wants to keep his 85% probability of success.
All because what was initially say a $250k starting portfolio is now down to $235k. Thus, what was previously a 5% withdrawal rate of $12,500 a year is now a 5.32% withdrawal rate. And that, my friends, is NOT sustainable for more than 70 retirement scenarios out of 100. (Oh, just as a side note, we ARE including taxes here).
So, what to do? WHAT TO DO?
A. Worry not. Are you doing everything you can be doing so when you reach your desired retirement age you will be in tip-top shape? I.e., putting money away, paying down debt, keeping an eye on spending?
If the answer is yes to all of the above, there literally is nothing more you can do, regardless if your probability of success is 5% or 95%.
Which leads me to:
B. Remember CASH FLOW IS KING! What are your cash flow needs? Are you blindly throwing out a number based on some silly cliched financial planning rule? Say, “you need 80% of pre-retirement salary”. Why? Where are those numbers coming from?
In my case, I can absolutely guarantee you Charlotte and I will not need 80% of our pre-retirement salary. Why? Because we’re raising 4 kids. And trust me, that ain’t cheap… Just yesterday, I had to drive down to GA Tech to take my oldest to an emergency visit with her dentist because she face-planted off a scooter. You can see the video here.
Presumably, she, and my other kids, will become self-sufficient enough to pay their own bills. We certainly won’t be paying for basketball and tennis leagues, school pictures, making 4 lunches a day, etc.
In fact, we won’t be paying the same utility bills either. No reason for my wife and me to stay in our home that accommodates 6 when they kids have moved out. Heating bills for a smaller home will be quite a bit less, never mind the water usage.
Let’s say we spend $100k a year currently. Is $80k a year, again using the boilerplate 80% of pre-retirement salary, a good projection? NO!
Not only does common sense tell me it’s not but experience too. I’ve seen many, MANY retirees get by just fine on $5k a month. In fact, MOST retirees that I’ve ever worked with have been just fine on that amount of money each month. Not all, of course, but most.
Oh, and please don’t think I’ve only worked with people in fly-over country where the cost of living is cheap relative to the coastal areas. I’ve worked with many a retiree in NY, Boston and the DC area too. $5k a month won’t go as far for them, but they certainly aren’t needing $10k a month, by and large.
So, what’s the solution? Simple. Run your retirement projections once a year just to get a gauge of where you stand. And then don’t do it again until the following year.
Also, you need to understand the inputs that are going into such projections. Inflation, rates of return, taxes, SPENDING NEEDS IN RETIREMENT. Are these inputs legit?
Lastly, realize that even if your projection says you are golden, or destitute, today, things change rapidly. Do not get too caught up in today’s numbers especially if you’re not even thinking about retiring for years to come. Just do what you can do to advance your cause, one step at a time. Each day try to do something, ANYTHING, to solidify your effort to leave your crappy, old job sooner rather than later.
Are you a budding author? Well, has pen met paper today, even for a chapter? Are you thinking of putting together a Solar PV array to reduce your electricity bill? What have you done to learn how to do this?
Act, don’t react.