March 2012 - Unpacking the 4% Rule
The headline above was from a recent article by a reporter for Morningstar and it caught my attention. This often quoted “universal rule”, touted by financial planners, states that a retiree can safely withdraw 4 percent of his portfolio, adjusted for inflation each year, and still have enough money to last for at least 30 years.
There are good reasons that this rule can be helpful when planning for retirement. Recent surveys have shown that 55 percent of Americans do not know how much money they need to save for retirement and 45 percent haven’t even tried to figure it out. Many people who think they know how much to save are guessing too low. Clearly there is need for guidance, and the 4 percent rule is a great place to start. Social Security, pensions, and annuities alone may provide adequate income for some folks, but many will likely need to tap into other retirement assets to make up the rest. If you rely solely on 4% withdrawal of assets, many experts say that you’ll need a portfolio equal to 25 times your annual expenses.
How does that sound to you? Depending on how well you understand the 4% rule (and how well you’ve accumulated for retirement) you may feel educated, liberated, or stuffed into a box! A pastor with whom I am acquainted often sums up his messages with the question, “So what?” I like that because it brings everything in his message down to the level where we live in reality. Nice sounding words (and financial formulas!) are fine but what does it mean for me and my personal situation?
I recently saw a TV ad for a well known financial services company. They promised not to follow any particular cookie cutter approach with their clients but to take time and “listen” well because each situation is unique. The unspoken thought was that any standard template is inherently bad for clients and, since this company does not follow mandatory systems, their way is better. They are tapping into the emotional need that all of us have to feel special and unique. I do not think anyone wants to be just a number in a system or feel like they have been squeezed into a mold.
But the truth is that templates, systems, and standard strategies are all useful in certain situations. Nothing would get done if the automobile had to be reinvented each time a transportation need arose. Yet, what means of transportation is the right one to use in any given situation? That choice is unique to each person’s circumstance.
“So what is the point, Gary?” I’m glad you asked. The point is that both sides of this outlook are correct. We need standard systems and unique thinking outside the box. You might need the 4% rule and other specific strategies. Along the same line, we need to bring our own insight to the situation and seek the expertise of others. It is unwise and often dangerous to be a “lone ranger.” Try to be totally honest with yourself and with the others from whom you are seeking advice. (I am assuming you can trust the one you are asking.) If you ask for help from a Financial Adviser, be prepared to share your unique circumstances so you don’t wind up in somebody else’s box!
Here are some examples of non-standardized considerations, all depend upon your situation:
- Contribute to your Traditional or Roth IRA even while you are contributing to your 401k or 403b.
- Start a spousal IRA (Roth or Traditional) for a non-working or lower earning spouse.
- Consider working part time after retirement as part of your retirement strategy!
- Consider working past your desired retirement date.
- Consider using a budget and reduce spending.
- Consider downsizing your home when moving into retirement.
- Consider guaranteed income for retirement.
- Consider non- guaranteed income for retirement.
- Consider utilizing only 3% of your portfolio throughout retirement.
- Consider saving more now before retirement.
- Consider changing your portfolio allocation.
- Consider planning now and not waiting till the day before you retire!!
We don’t have an agenda at Faith Investment Services except to work with those who need some help and want to work with us. Let us know if we can do so.
LONGEVITY REWARDS
We are so thankful for our long-time clients. We are having a number of writing pens engraved to send to our clients who have been with us 5 years or more. Much appreciation to Barb & Russ, Bill, Bob, Kevin & Carla, Dave & Debbie, Glenn & DeAnn, Diane, Jim & Dorothy, Doug, Harold & Vicky, Jean, Joe & Nancy, Michael & Jennifer, Jim & Laurel, Ken & Sue, Lucy, Maryann, Mel, Mike, Phil & Yvonne, Phil, Randy, Rob, Susan, Tom, Vern, and Mike. In 2012, 27 other clients will also reach the 5 year mark. We rejoice in God’s goodness!
NOW…ABOUT YOU!
We spent considerable time in our last newsletter telling you about our office, our staff, and our reason for serving you in the financial arena. Now, we’d like to turn the tables and invite you to tell us about yourselves.
The database we use to keep track of contacts has the capacity to store a picture of each contact. Many of you are known to us personally and we’d love to have a picture of you. Others are ‘friend of a friend’ and we may not know you personally. We would LOVE to have faces to go with names!! Will you consider sending us a digital photo via email? Please send them to kathi.dunlap@cfdinvestments.com We won’t post it on Facebook or share it in any way. It is just for us to know you better (and to enjoy your smiles!)
Also, we have a link to a brief survey on our website. If you’d be willing to complete the 5 minute survey, it would help us to know how to better serve you!
DON’T BE OVERWHELMED BY RETIREMENT PLANNING
We’ve discussed in recent newsletters the 3 phases of retirement. The first phase, Accumulation, is perhaps the most impactful and yet it is easiest to neglect…or put off. It just doesn’t happen in the “now”. Mr. 45-year-old with a growing family goes to basketball games and choir concerts, fits in a budding hobby, and manages business affairs. The dailyness of his life crowds out long-range planning. Could it be that we get stuck thinking about retirement planning as an “all or nothing” issue? We assume that picking up the phone and “starting the conversation” is going to trigger an avalanche of obligation.
It is a top priority at Faith Investment Services to help clarify things, not complicate them. Ask us for a review of your current investment portfolio to know whether it is appropriately diversified and meets your goals and risk tolerance. Ask us how to set up a systematic savings plan. Ask us to review your insurance coverage to protect you from gaps that could decimate what you have accumulated. Ask for a moral review of your investments to see if your investment plan aligns with your values. Frankly, much of the work is done on our end and the knowledge you gain is invaluable.
The In-Transition phase involves those who are within a few years of retirement. There is not as much time remaining to accumulate, but often there is still time to make ‘course corrections’ that are helpful. The strategies we employ in this phase involve making decisions about timing (when to retire, when to start Social Security, and so forth), goal setting, income planning, and more. If you get to this stage of the game and you haven’t “done the math” about your potential retirement income, having a conversation is imperative.
The Distribution phase is where the rubber meets the road. A competent, trusted adviser can help you at this time make solid choices for the gradual distribution of your assets to fund retirement. Is the 4% rule best for you? Do you need to augment your income with a part-time job? Do you have ministry plans that require special funding during retirement? A client of mine was recently asked about what else she would like us to cover with her. Her answer was poignant: “I don’t know what I don’t know. So I can’t ask about what I don’t know.” She’s right. Often we don’t know the questions to ask so we end up lacking necessary information to make a good decision. That’s where a seasoned adviser makes all the difference.
Please contact us today to ‘start the conversation’ about your own retirement. It’s never too early…and it’s never too late. We can help you get “unstuck”!