When you ask, “do you have enough saved in your retirement account?” most people I know answer “no.” Why? Since most peoples retirement accounts are invested in the stock market; don’t look now, but after last week stock market’s plunge, all of our retirements have taken a hit! In addition to the hit, is this reoccurring or constant factor of inflation cutting deeply into your retirement. Whether you’re planning to retire soon or you’re just beginning to save for retirement, let’s discuss some considerations as you plan to ensure that you have enough.
Rule Change Mindset:
If you have been working with a financial advisor or learning about retirement plans and investing, you have probably been advised to follow what I call the “Bengen Rule”. Developed in the 1990’s, it is also known as the 4% rule.
The simplified version is that in the first year of your retirement, you should withdraw four percent (4%). Then for each subsequent year, you increase your retirement withdrawals by 4% plus the rate of inflation for that year. While this is not a tax or math class, I’m sure you can calculate those amounts. But this calculation, presents more problems when trying to figure out whether your retirement savings are going to be enough.
One problem with this advice and rule is that in 2022, the rate of inflation is estimated to be about eight percent. Have you been saving at the rate of inflation? Is your retirement such that you can withdraw annually at four percent, plus the rate of inflation?
Perhaps, the ultimate problem with this rule is what is known as sequence of return risk, especially when the stock market is not performing well. A simple explanation of this concept is: if you withdraw sizable amounts from your retirement in the early years, then the balance remaining would be smaller. Now, if the remaining balance is smaller each year, then the return on those invested funds would decrease each year. This continued cycle, does not allow you to have enough assets to invest when the stock market recovers or is doing well again. Your resources will have been depleted from those earlier withdrawals, and higher inflation rates.
In addition to the reduced assets for investment, you may actually run the risk of living beyond your retirement reserves. This picture should cause you to revise your retirement plans and change your mindset from implementing the popular 4% rule. Experts are now suggesting the rule should be changed to 3.8% in order to ensure individuals will not run out of money.
Building your Retirement
One of the biggest threats to having enough in your retirement is the spending or use of discretionary expenses. I am not suggesting a change in lifestyle, but, I am suggesting a delay in some events or items.
Now that the pandemic restrictions have eased and things are improving you may want to purchase that new vehicle. But is it the right time to make such a move when supply chain factors have not eased? For example the prices of new vehicles have increased approximately 12% this year. Will supply chain factors last forever or will there not be some reduction in prices and can you wait?
Ensuring that you have enough saved for retirement can be complicated, but fortunately under the 2019 SECURE Act, you may have some help. Under this act companies are now required to provide illustrations on a quarterly or annual basis of your monthly income if you converted your funds to an annuity. The illustrations would provide the monthly amount you would receive if you were to retire now or a later age. This new data, should help you determine whether you have saved enough to sustain the lifestyle you currently enjoy and want to sustain in the future.
Today’s what’s up is about making credit work for you . Last week one reader told me that he had to pay bills but had exceeded his credit utilization rate, maxed out on his Instead of facing adverse consequences, he called up the credit card company and requested additional credit.
To his surprise, he was granted additional credit or shall we say much more than he needed. Because he understood how credit works, what did that do? Well, it reduced his credit utilization rate and now his credit score will not be impacted by that significant factor of 30%. Instead, because additional credit was granted, his credit score would only be impacted by perhaps 10% for new credit. That’s how your make credit work for you! And that’s what’s up!