Broker Check

Failure to Plan is a Plan to Fail

| May 20, 2023

Think about this: someone makes $500,000 a year and retires with $4,000,000 of assets. Would you consider them financially independent?

Well, unfortunately there is a high likelihood they're going to run out of money assuming they continue the same lifestyle in retirement as they have today. On the surface they look successful, but when you do the math as you'll see below, there's just not enough assets to replace their income. Or they're going to have to cut their expenses drastically in retirement in order to get by. And I don't know a ton of people who's objective is to bust their tail during their career, only to get to retirement and be forced to live on less.

Most of the people who say they don't need as much in retirement do so because they have no choice. That might be harsh, but it's true. No one has ever been upset with having the freedom to spend more money, especially when they are in retirement. People travel more. People go out to lunch or dinner more. People go to more concerts and events. If you think about it, everyday in retirement is a Saturday, and you probably spend more on a Saturday than you do a normal weekday, or entire Monday-Friday work week.

So back to the original example, in it's simplest form, $4,000,000 divided by $500,000 is 8 years worth of income. 

"But the $4 Million will be growing because it's invested, Blake!" 

Sure, and what are those expected returns in retirement? Remember, you're retired now, so there's a decent chance you've been told and feel more comfortable taking significantly less risk in retirement. Are you going to be investing that money as aggressively when it needs to generate your income?  If you get 4% on $4 Million, that's $160,000 of potentially taxable income, either at ordinary income taxes or capital gains depending on the type of account. On the low end you may be paying 15% to 20+% assuming taxes stay the same as they are now (tough chance). So after the low end of taxes you're at about $136,000 per year of income.

In this very basic example, this person is now forced to retire on about 70% less income than they had while they were working. I'm sure there will be people out there that think "Oh not a problem. I can live off of $136,000 a year!"

Maybe in today's dollars.

People in the 1960s made $5,000 a year and that felt like a lot of money back then. It's not uncommon for people to spend $5,000 every two weeks nowdays. In 30 years, at a 3% inflation rate, which hopefully we get back down to soon, that $136,000 is the equivalent of just $56,030 today. 

I ran this hypothetical scenario through a Monte Carlo Simulation, which is an algorithm to help stress test various asset distribution scenarios given certain inputs like asset value, annual distribution, inflation rate, tax rate, study period, and portfolio risk/return model. Here are the results...

I recalculated again to get a new set of numbers, thinking no way it's actually 100% failure rate...

Same results...

So I changed some inputs...

How about a 20% tax rate?

Same results...

15% tax rate?

Same results...


Finally a change...

Simulation failure rate 99.96%

What's also eye-opening to me is the fact that we are assuming a portfolio model that has returns around 6.5%, which if you ask most people is about what is to be expected in the S&P 500 over a long period of time.

So let's change an input and now we get to retirement, but continue taking higher levels of risk...

So I changed the tax rate back to 25% and used a balanced portfolio that's generating around an 8% return...

Simulation failure rate 99.92%. That's not any better.

So let's change this to the $160,000 of income mentioned above...

Simulation failure rate 30%

It's crazy to think that the only way this plan (marginally) works is if you are forced to live off of about 70% less income in retirement AND you continue to take a higher level of risk in retirement. And even at that you still fail about one third of the time.

But it's just math. 

The scary thing is about 80% of people have a fingers crossed plan for retirement1. Of the remaining 20% or so, most of them are doing something about it. Maybe they work with an advisor in some capacity, or they've put numbers to paper and started to try and figure out a plan. 

This stuff isn't rocket science, but it's also not something we should just leave up to chance. After all, this is your family's financial future we are talking about here.

With a formulated plan in place, and taking action on that plan, we can start to accomplish some amazing things. 

I've been practicing for almost a decade now, and there are a number of clients that we can look at where they were years ago and where they are now, and their assets have grown by 1X, 2X, 3X, and more. It's not because they've done some crazy, super risky investment that just hit it big. To my knowledge, none of my clients have won the Powerball lottery either.

It's simply because we laid out a plan, discussed the things they want to accomplish, and set our sights on hitting those benchmarks that we defined would help keep us on track. Of course there are bumps along the way, which is why it's so critical to have a plan.

You can do it to, so what are you waiting for? 

If you are waiting for an invitation, here it is. Click this link to be directed to my calendar, book some time, and let's get after it!

I look forward to speaking with you and helping to customize your plan.