What Is The Biggest Risk To Your Retirement?

In the last few years I've become fond of talking about people preventing/solving their own problems. A hot button for me is not wanting to be dependent on anyone to come save me. If I need help with a task, I ask, but the context here bigger picture long term things. For example if someone is relying on the government for help, they just become a statistic or a file in a stack of files (metaphorically speaking now because it's all on computers or the cloud) on some overworked person's desk. 

I talk regularly about maintaining and improving optionality which can include staying physically fit and mentally sharp to have a better chance of being able to take advantage of something that comes along that you might want to do or need to do. 

We all have some vision of what our retirement might look like or maybe we call it our next chapter. I am assuming people who are at least in their 40's have some idea anyway. At some point we start to have a little better understanding how we might finance that next chapter.

A common path of course is a combination of Social Security and income drawn from a retirement portfolio. Moving further along you start to understand about sustainable withdrawal rates and you find the 4% rule. At a high level the 4% rule says you can take out 4% of your starting value every year and have a better than 90% chance that your money will last. 

As you dig further, you probably will also find that if you take 5% out every year you have a better than 80% chance that your money will last. Any advisor will have clients who've take more than that out over the last 10 years or so, I certainly do, and are doing just fine thanks to fantastic stock market returns. Those people have gotten lucky. 

At some point taking out 7% goes from being a one-off, it happens, stuff comes up, to being a regular thing and if someone is taking that much out then they didn't save enough for their spending requirements. That's a risk to anyone's retirement math, not having enough money for whatever reason. 

Think about the person who has been taking out 7% for the last 10 years but instead of fantastic returns in the market, the returns were more like 2000-2010, down 18% per Yahoo Finance for the ten year period ending 1/4/2010. In that scenario our seven percenter has probably blown up. 

Morningstar has a current article that addresses the need for future retirees to take less than 4%. I'd put that idea in the something's gotta give category when a plan is in jeopardy of not working due to mediocre or worse returns as the article cites as possible for the next ten years. 

Back to preventing or solving your own problems, how reliant is your retirement financial outcome on the 4% rule working for you? If you think you need $7000/mo to live on, you expect a combined $4000 from Social Security, then you'll need to figure out where that $3000 will come from. If it will just be from your portfolio then $36,000 divided by 0.04 means you need $900,000 in the bank. That obviously is applying the 4% rule literally but it leaves no margin for error. Also, if the entire $900,000 is in a traditional IRA account you will owe income tax on the withdrawals so your 4% of $900,000, or $36,000 that you need to make it work every month is actually just $28,800 or $2400/mo. Is that going to be a problem? 

Here's a curveball, what is Social Security gets cut, what does that do to the above scenario? What if instead it gets means tested down to a combined $3000/mo? Between SS and the portfolio those are serious haircuts to income and neither scenario is farfetched, I mean the taxes, that's going to happen.  

Your retirement or next chapter might be vulnerable to something else or multiple things. The time to figure that out is now so that you can then figure out how to mitigate that problem or any other problems you can reasonably foresee. In terms of something's gotta give the simplest mitigations would be to cut your overhead, find some sort of active or passive income that relieves some of the burden you place on your portfolio or some combo of the two. 

In past posts, I've talked about our having a Plan D for our old age in case a whole bunch of things go wrong. A buddy teased me about that but for whatever reason, I am very motivated to not have my hand forced into something I perceive as a negative in kneejerk fashion. I don't know where that comes from but that is a big part of how I solve problems. It's also a big part of how I construct and manage portfolios and run the Walker Fire Department. 

It is up to us to prevent/solve our own problems. No one will care more about your outcome than you.