I think it’s safe to say that the most infamous mountain in the world to climb is Mount Everest. More than 280 people have lost their lives trying to make it through the clouds to its 29,029-foot summit. Some have made it their life long mission to navigate its dangerous terrain to hopefully get to its peak and only a few of them will actually make it. Let us imagine for a moment we are standing on its summit looking down at the world and as we gaze out into the infinite beauty, we look back on the years of preparation and the challenges we overcame. It is probably an understatement to say the feeling of accomplishment would fill us with pride. Now that we have staked a flag at the top of the world, at some point it will start to set in that we are only half way to our final destination which is standing safely at sea level. We need to start our journey down but a feeling of concern rushes over us. We had focused on getting to the top so intensely for so long that we hadn’t thought about a safe descent. How will we get down?
Sounds ridiculous, right? Would anybody start to climb the most dangerous mountain in the world without thinking about a plan for a safe descent? Of course not. With that said, it is concerning to me that there are millions of people currently relying on simple retirement accounts to get them “to” the proverbial “Everest Peak” we call retirement and very few will ever ask about the descent until they get to the top (Maybe sometimes as they approach the top). Most will never have the opportunity to understand how they are going to spend their money without running out. I’m not suggesting that the ascent is not incredibly important. I’m simply suggesting that we need to look at retirement planning as a long journey that starts with a climb and ends with the ultimate goal of getting down safely. The best kept secrets within the financial planning process are the ways you can pack your bag before you make your way to the top to make sure you can get safely to the bottom. These techniques can exponentially improve your chances of success because the biggest dangers exist on the way down.
Let’s go a little deeper and look at a comparison. Let’s say you and your significant other are 65 today. Today is the day you both finally get to retire, and you have a choice between one of the following. Your first choice is you get 4 million dollars and you will be able to spend 3% per year safely without running out. Your second choice is you get 3 million dollars and you will be able to spend 5% per year safely without running out. Stumped? 4 million is looking pretty good but how good is it if you can’t spend it the way you would want? The rate at which you set yourself up to be able to spend can have a huge impact on your income streams and in turn on your lifestyle in retirement. This is where packing your bags early and doing proper planning are extremely important because it can set you up for higher distribution rates. Wait till retirement to put together a spending plan and be stuck with a spending rate of about 3-4%. Plan early and you will have control and, most importantly, more options that will set you up with a higher distribution rate.
You may be thinking at this point, “What could possibly set me on this path?” One of the biggest, if not the biggest, threats we face while embarking on our retirement journey is what is called sequence risk or sequence of return risk. This is the risk of the unpredictable ups and downs of the market and how they work with withdrawals from retirement accounts. Simply put, this risk could reduce the principal of our retirement accounts in the early years of retirement and if our only choice is to spend from these accounts before the market bounces back it can greatly reduce our chances of success. With proper planning you can strategically pack your retirement bag and buffer, or essentially insure your nest egg against sequence of return risks allowing you to spend more of your money safely. Your future self will thank you.
Episode 6 – Your Year-End Financial Planning Checklist: Part 4