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Wednesday, January 25, 2017

Retirees Don't Run Out of Money

Polls consistently show that the number 1 fear of retirees is running out of money. But rarely do retirees literally run out of money. It doesn't happen that Joe goes to Mildred and says "darling we've only got $100 in our account. What are we going to do?"

Instead, what people tend to do is run out of lifestyle. More typically Joe will go to Mildred and say, "honey, it looks like we can only afford to visit the kids twice this year instead of three times." And Mildred responds, "but Joe we are only 71, in good health, and my number 1 thing in life is seeing my grand children".

Of course, the academic literature needs to simplify and where possible interject the math. So they frame the problem in terms of how much can be withdrawn over a given period without running the balance to zero. The magic number of course, which is debated, is 4%. With a nest egg, the rule of thumb is that 4% adjusted for inflation can safely be drawn down.

Thinking about lifestyle rather than some percentage can be enlightening however. It gets pre-retirees to focus on what is important in their retirement years. How many times do you want to visit the children? How much does it cost to play golf constantly to realize your dream of reaching the pro tour? How big a house do you need to live in and how much does it cost?

In fact, many people will only have a satisfying retirement if they can continue in the same house they lived in when they had 3 or 4 kids at home. It is important, of course, to know this going in.

Then we also have the world travelers working off a so-called 'bucket list". Some people view their dream retirement as one whereby they will be able to take at least 3 major trips/year.

All of this leads to a type of bottom up approach. It suggests the idea that in approaching retirement a list should be made listing the important things that you want in retirement and their estimated cost.
This then can be used to see if the anticipated income stream satisfies the needs. A tricky part , of course, is to keep  medical needs in mind. A  couple's lifestyle can be upended by medical surprises.

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