Do You Really Need to Save 8 Million Dollars to Enjoy a Modest Retirement?
As originally appeared in the Jerusalem Post on August 21st 2020
“I exaggerate all ourselves, our beings. I make fun of everything; of our life and what we are. But I don’t tell jokes, really, I just exaggerate life, and it comes out funny.”
Don Rickles
A few days ago, my wife and I took our kids to Tel Aviv for a vacation day. We had a fun tour of Florentin graffiti and then went to the Lehi museum, which is in the same neighborhood and is where Avraham “Yair” Stern, on of the founders and leaders of Lehi was captured and killed. After watching a video of the suicide pact between Meir Feinstein and Moshe Barazani the Jewish underground fighters under sentence of death, (the two killed themselves embracing each other with a live grenade lodged between them hours before their scheduled hangings) I turned to my wife and said “That from time to time we need to hear these stories”. We are too often stuck in the rut of everyday life, and lose sight of those who made the ultimate sacrifice so that we can live comfortably in our homeland.
Then I got home and started to read the financial press, to catch up on what I had missed all day. And that’s when I stumbled upon an article about how much you will need to save to enjoy a “modest” retirement. According to Shawn Langlois of Marketwatch, you will need US$8 million – this is the new magic number! Yes, that is right! Forget about everything you have ever heard or read. This new figure also means that you have virtually zero chance of having a modest retirement. There is nothing like a lot of financial drivel to bring you down from the spiritual high and solemnness of the museum than to read some ridiculous approach on retirement planning.
The 4% Rule
Shawn Langlois’s claim is based on the fact that the 4% rule no longer applies. What’s the 4% rule I hear you think? According to Schwab Center for Financial Research, the rule is that you add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
By following this formula, you should have a very high probability of not outliving your money during a 30-year retirement according to the rule. For example, let’s say your portfolio at retirement totals $1 million. You would withdraw $40,000 in your first year of retirement. If the cost of living rises 2% that year, you would give yourself a 2% raise the following year, withdrawing $40,800, and so on for the next 30 years.”
Langlois bases his thesis on the fact that interest rates are now at virtually zero, and as such, there is no way that a 4% return is doable. He quotes the Financial Samurai blog to prove his thesis and writes, “Or you can use the 0.5% Rule as a stretch net worth target. To find out how much net worth you need to declare financial independence, multiply your desired annual expenses by 200. If you want to live off $40,000, then your stretch net worth goal is to accumulate $8 million.”
This approach eliminates using dividends and corporate bonds as a way to generate income. It would be pretty reasonable to assume that on $8m you could pretty much keep the principal intact over time and generate more like $200,000 a year, with also keeping some growth as part of the portfolio. Look at it this way, on $8m if the need is for $40,000 a year, just by leaving the money under your mattress, and no money invested, you would have minus inflation almost 200 years’ worth of money. And if that plan blows up, there is nothing wrong with taking some of the principal amount for use.
This style of article is one of my pet peeves. It does such a disservice to readers who are trying to be financially prudent and responsible for their financial futures. They read these articles and are demoralized as they realize that there is no way they will ever accumulate $8m. You have to ask, what’s the point of writing such an article?
How to Calculate Your Retirement Funds
As I have written numerous times, the way to answer the question of how much money you need or will need for retirement is first to figure how much you think you will need to spend on a monthly/annual basis. Then start adding up the projected amounts you will receive from your pension, Bituach Leumi and Social Security for you Americans. If you come up short, you will need to tap your investments for supplementary income. When figuring how much you can generate from your portfolio, the 4% rule is still applicable. If you need slightly more income than you can generate using CD’s and bonds, it may pay to look at dividend-paying stocks as an alternative. If you are unsure of how to make the calculations or don’t know how to create an additional income stream, it may be smart to speak with a financial advisor who can help you achieve your goals and meet your financial needs.
