If you look at how we’re wired as human beings, “retirement” is an odd concept. For the last 200 or 300 years, we basically worked until we died. Long before that — as hunter-gatherers — we relied on the care of our tribe for protection, while we offered the wisdom we’d accumulated over the years, in return.
It’s unprecedented that individuals are expected to rely on a bank account alone to make ends meet for the last few decades of their lives. And yet… here we are.
I think there’s a better question to ask instead of how “safe” is your retirement — and that’s how “fragile” are you, financially speaking, in the face of the most common retirement pitfalls? I’ll walk you through three of the most common, and how you can test your readiness.
Can you pull out less than 4% of your nest egg and make ends meet?
In the financial planning world, there’s something called the 4% rule. Basically, it says that in your first year of retirement, you can pull 4% of your money out, adjust that number up every year to match inflation, and you should have enough to fall back on indefinitely — assuming a 50-50 mix between stocks and bonds.
But nothing makes this strategy more perilous than terrible investment returns in the first five years of retirement. That’s because the money you pull out for living expenses is being “sold” for cheap valuations, and it won’t have any chance to grow during the following three decades.
To get the gist of what I mean, check out this chart. It shows a nest egg of $500,000 that follows the 4% rule. In most years, the portfolio advances 5%. But each one has a two-year period where returns dip 33%. Of course, that’s not common, but it’s also not impossible.
The only difference is when this dip occurs: at the beginning, middle, or end of retirement.
There’s really only one solution to such a problem: If this disaster hits early in retirement — think of those who called it quits in 2007 — taking out less than the standard…