Retirement Rules of Thumb

Mr. Stillman's opus. I know without a little hiatus job but Scott be back on with you year released you when you listen to this. You might might be two years to foster a John still employed is also possible. It's a podcast right so they could was last week.

Yes that's on hiatus for you when you listen glad to have you on the show today Douglas Rosenthal but I me a little time off me so like you have been working right at me, things been pretty busy stay in pretty constant with things but decided to put up the podcasts off to the side for just a little bit sometime some of the things a priority while riding back with you and talk about rules of thumb today and I'm assuming John you know the guy that sticks the rules all the time right would possibly make you say that about a know you have last two years will start. There are some Lotta rules of thumb, though in finance and I know it when you're building of financial plan with your clients. You thought about customization and make sure that you put them in the position that fits them the best. So rules of thumb. While there great I guess in general right baby is getting the starting point for a lot of people don't always necessarily apply to everyone you meet with will know.

I think that's the thing that a lot of people get confused about as though here's some these rules on TV or seated in money magazine or something in the think that applies to them what my but it also very well might not will help try to explain that today you will guidance on whether or not these rules of thumb that you probably heard of and that sound like they make a lot of sense of the most part, why maybe should befall these as we go.

Money can always find everything you need online@rosewoodwealthmanagement.com you can schedule a time to meet with John there as well was jumping these rules John to start with the rule of 100. Now this is the rule that helps you decide to determine how much risk you should be having your portfolio, you take the number 100, you subtract your age and boom spits out the risk you need Scott to be accurate right so this is a fine place to start a conversation.

So let's put some actual numbers on the bid and you are 4141 okay so hundred -41 would be 59 that tells us that 15 according to rule 159% of your investments should be at risk in the market, and 41% should be somewhere less volatile. Honestly the rule 100 really doesn't apply at your age for you. At age 41. You should still pretty much be all in the market over and above your emergency fund and all that stuff that you need to have in the bank from an investment standpoint, you really should be all in the market so I would say the rule 100 doesn't really even apply until you're at least in your mid-to-late 50s.

That's one caveat on the rule 100 over and above that it really is just a place for a conversation starter. Let's suppose you're 60 years old and you say 100-60 gives me 40. That means I should have 40% of my portfolio risk, and 60% in a safer place.

Well, maybe that's a fine place to start a conversation. So if you say I'm 60 and I have 98% of my money at risk in the market and 2% in a less volatile place well all right maybe this raises an alarm bell for you raise an alarm bell sounds awful lot raises a flag that sounds a lot okay whatever alert system you're using.

It should set off the alert system somehow you know what, maybe I have too much risk. Maybe I need to take a look at is not. It doesn't automatically mean that you're wrong but it at least mean that it warrants a conversation, on the other hand, if you're 5000-50 is 50s of 50 of the market at risk 50 in a safer place and you say well you know I have all every penny I have is in savings or money market at the bank okay will this is a good sign that you're not taking enough risk as the rule 100 would help you figure out so fine place to start a conversation if not actual retirement planning. We can't just say okay well you're 63 so we only want 37% of your money in the market, we can do a little better than that from a sophisticated financial planning perspective.

But the fine place to get some perspective on where you stand. Okay, great starting point is one or two like any set number and the market does that. You just specifically talk about equities that were talking about we talk about being invested in the market.

Yes, so following the overall indexes.

In general, the doubting S&P. The NASDAQ to not do so. A big sigh that is a whole different sale brother just checking it out I 75% rule so this was good because were try to figure out how much income you get any rights of the rule states away what you retire need about 75% as much income as you need while you're working so again I'm guessing this is not just a plug-and-play you got it do a few more calculations.

Yeah. And part of the thing about this rule is not clear is are we talking about gross income. You'll need 75% that are we talking what you're going to spend 75% as much. Once you're retired, then you spent while you were working. I would say for most people that's not particularly accurate. I think a lot of people say well yeah when we retire we could we could get by on some lesser amount than this mama working but realistically can you actually do that, and the second question is, would you want to you want to retire just so you can sit around the house and never spend any money on anything so I would say for the overwhelming majority of people there going to end up spending pretty close to what they spent when they were working now. If you are saving a lot of money from your take-home pay meeting after you've already made your 401(k) contributions and all that.

And let's say you have pick a number $10,000 a month coming into your checking account through your paychecks on a monthly basis but you don't spend all of it so you only spend 7001 than your investing $3000 a month from your take-home pay. Well once you retire and you don't need to continue saving at that rate, then yeah you can live off less income as a retiree and you had when you're working because you're saving so much of your working income again were not talking about your 401(k) because that all happens before your paycheck hits your bank account so much like the rule 100. It's an okay place to start a conversation. It's in no way something that you should plan your retirement around essays like out of all the weather and get through today. This is the one that like you want to guess on right like this the one you want to really hammer in and try to get an exact answer as possible. Yeah, I mean we have a pretty easy way that we can hone in on this number with folks you don't have to go through and add up all of your expenses and say which of these am I still going to have in retirement, which might not let me look at each line item in the budget, there's an easier way to do that we can help you figure out what that number is like a set for most people it's knocking to change a lot from your working income to your retirement needed, but there are exceptions in either direction. I rule 72, so this was a bit of an exception to in terms of vicious math so you really can't refute how this rule 72 works necessarily, but I guess what we need explain is why is it useful so the rule 72 basically says you take the number 72 and divide it by your interest rate and that tells us how long it's going to take your money to double so what's with the math on that.

Let's say you're getting 2% interest rate on a money market account actually pretty good. In today's environment and civil say 72�2 is 36. That means it would take your money. 36 years to double at that rate of 2% per year. On the other hand, if you were getting 10% return, while 72�10 percent. Little over seven years, 7.2 years is how long it would take your money to double so it just gives you an idea if you're assuming a certain rate of growth how quickly your money can grow. Now the thing that's deceptive about this is that it creates this mindset that you need your money to double or maybe do. Maybe you don't. If you're 35, you probably need your money to quintuple or sex double by the time you reach retirement both between your contributions and the growth on those contributions. If you're 63 and your retiring next month. What we don't necessarily need your money to double. We just need your money to more than anything, stay there for him to not go away. So at different stages in your life you have different priorities and yet, like you said you can't really refute how the rule 72 works. It's a fun little weight up to figure out how quick money is going to grow but you just have to remember that at some point in your life. Maximum growth should not be your goal so don't get too sucked into thinking about how fast my monies going yet. To me this just shows the importance of compounding when he when he thought about 22% return taking 36 years, compared to 10% return and it is a pretty significant difference about a paper that doesn't seem like a huge gap within her talking about 25 years or you know quarter of a lifetime for most people is more so that's a pretty remarkable difference yeah and it's a fun little way to look back at what interest rate.

Have you gotten in certain accounts.

In past years on the target rate of growth in the market because that's not linear right like you might make 37% one year and lose 20% the next year. It's not as productive. The dreaded average those out and figure out your rate of growth. But if it's a fixed type of account where you're getting some kind of regular annual fixed interest. Just an interesting way to look back and see right well how is it anything you the list, one that I have heard a lot about the role five which says, on average, we experience a bear market every five years so made is that accurate is it sound right to you and and why do what is this matter. Well, so this is accurate in the same sense that the the old geography department chair at UNC always claimed that geography majors had it higher average salary than any other major Carolina and of course the punchline of the joke is because Michael Jordan was a geography major proper progress right so that's been said for years.

It doesn't actually tell us anything about what geography majors actually make compared to other majors and this is kind of the same Wesley yeah you could say on average we have a bear market every five years but it is in no way every five years like clockwork.

I mean, think about the run. We had from well 2009 really after we recovered from the steep drawdown of 2008 self in the spring of 2009 we were essentially at that bottom in the market just roared ahead until the beginning of the pandemic. So that was more than 10 year run which tells us, on average, were going to have bear markets much closer together at some point to cancel out that long to run so you just can't sit around and assume, all right, well, about every five years you were doing for one were due for a downturn.

Now you might have another couple good years and you or you can say well we just had a bad downturn a couple years ago when a family in the suit you just don't know is the point that question say investment's long-term perspective that you want to keep in mind this when I'm I'm really curious your thoughts are. Because we all can look for benchmarks to see how our training we are weak.

Keep it up where we need to be where should I be when I get to retirement how much you have saved while rule 10 says 10 times your salary should have saved by rate for retirement by the age of 67 so she is very subjective. Again, an okay place to start a conversation not something you can actually plan your retirement around the flaw with this is it assumes that everybody's going have roughly the same retirement spending needs in terms of how much money they need from their portfolio, you can assume yeah well if everybody invested the same way and retired at roughly the same age. Well, then, yes, we can assume about how much they would need saved relative to their current spending habits for the past spending and earning but the reality is, some people are going to have fixed guaranteed income streams that they're just not going to spend over and above like as an example, I have quite a few clients have you know Social Security for two spouses. Maybe one of them was a state employee for several years may have a big pension and there's going to spend very much at all from their investments. I have a multitude of clients that would fall in that boat and so they might need one or 2% from their portfolio every year to supplement their Social Security and their pension, but there really is not pulling very much outside the amount that they would need to have saved in order to have the lifestyle they wanted retirement is substantially less than 10 times their salary.

On the other hand, I have clients who are going to really ratchet up their lifestyle. Once they retire like one couple it comes to mind. They own their own business.

They work all the time.

They never take a vacation. They never have the opportunity to spend money because they just work all the time. What once they retire there to be traveling all the time and spend a lot more once they retire than they spend. Now in their late 50s, while owning a business. So for them, they might need more like 15 or 17 times their salary save for retirement because of the lifestyle he will have so yeah identifying place to start a conversation from the standpoint.

If you make $100,000 a year and you have $100,000 saved for retirement.

You're probably not ready to retire now even having said that, there could be exceptions, but we can in general say that you're probably not in great shape but if you make $50,000 a year and you have $3 million saved for retirement. You're probably in pretty good shape everything in between those two examples I just gave probably needs a conversation there enough by last one I got for you to take take us there was a 4% rule, which is one that many people have heard about you take out forks in your portfolio each year without running out of money. Probably good starting point.

I guess I'm assuming how'd you guess yeah I mean, again, was put numbers on it. You have $1 million saved. That means you can take out according to this 4% rule $40,000 a year without Arnold estate with no risk of running, out of money, but it's a very low risk of ever running out of money if that was your withdrawal rate. So on one hand, we say well somebody who's been able to save $1 million. They're going need more than $40,000 a year to live on retirement will yes but keep in mind this is only the money coming off of your investments. This doesn't factor in your Social Security and pensions and things like that rental income for some folks have a lot of clients for at least a handful of clients who have sold the business in their being bought out over the course of your so as an example, a dentist retires sells his practice and he's getting paid out recently did an owner financing deal. And so he's getting paid for 10 years. His first 10 years of retirement he's being paid back for the cell that practice. He's not going to touch any of his investments from age 62 to 72 while he collects on the sale of the business so he's not going to need to take any drawdown on his soap again. It's just a case-by-case thing 4% is a little bit risky from the standpoint of we going to retirement and you're taking 4% off of your investments every year and we have really bad stock markets in the first couple years of retirement will now you're taking 4% off what is a dwindling portfolio as the market is crashing and you're taking money out, which means you're selling stuff on sale in order to create your income in order to generate that 4% cash flow and so then those shares of whatever it is you're invested in what they are to recover when the market comes back and you can see how that creates a problem. So a lot of this is determined by what the market does your first couple of years of retirement and since you can't predict what's going to happen with the market. The first couple years of retirement. You need to be prepared for either outcome well. Bottom line is, be prepared in the best way to do that is through planting these rules of thumb while they be a great place to start in just to come to begin the conversation there by no means the end of the conversation so you want to start that begin with Rosewood well.com that is the website to get touch with John scheduling there and then course channel explain these rules and much more detail and really get to spite me self stuff as always Scotty back on what the podcasts crank etiquette meant to talk with you will do it again. We won't wait a year. Okay, enough like you listen Mr. Stillman's opus for John Stillman of Carolina welts towards doing business as Rosewood well is a registered investment advisor in the state of North Carolina presented isn't generally and should not be construed by any consumer is the rendering of personalized investment advice