How To Never Run Out Of Money In Retirement: Answering A Common Question & Revisiting The 4% Rule

Hi West Moss today, how do you

never

run out of

money

in

retirement

? Well, we have to follow this important

rule

that we will talk about today. Welcome to Facebook or just

money

matters live. Thank you for joining us. We've done it. So much research on this really is the scariest thing in anything to do with financial planning and investing. The biggest fear is running out of money, no matter how much you have, whether it's five hundred thousand dollars, two hundred fifty thousand dollars, one million or two. million or five million, if you're taking too big a percentage, it's been studied and studied in the studies you studied, you can run out of money, so what's the optimal number to take nothing, what's the point? to save if you're only taking out one percent or avoiding taking too much, so you're worried about running out of money completely, so today, how to

never

run out of money in

retirement

, let's follow this important

rule

, okay?

Let me start here, so what motivated this Wall Street Journal to publish an article recently that said that the conventional wisdom or the rule known as the four percent rule is four percent of your money and I'll explain it in just a The second very important role was too high and that you can only make three percent and here you have more or less three percent of your money and as soon as the Orman recently said that you had to work until you were seventy, suddenly it seems that I went to work forever, you can barely get anything out of your money, what's the real answer here, well, it comes from a very important historical study by a guy named William Baingan, aeronautical engineer at MIT, the super-smart-turned- financial planner, and this is Back in the early 1990s, he published a study that looked at a bunch of different iterations of withdrawal rates.

Hey, if I take this amount of money, if I take 3%, 4%, or 5%, what is the probability in different? start dates, which is so important here, whether I retire in two thousand one, two or five, and if so, whether I retired in 1929 or 1955 or nineteen six five, what was my chance of running out? money in all these different iterations? 3% 4% 5% and then all these different portfolio iterations and what he effectively discovered was that and this is what the rule states is that you could take 4% of your money, no no, 5/3 was too low. because it was the optimal one and Then he updated it to 4.1 and 4.2, but that's how you get to that number and by the way, this is very important.

Don't you want to watch the end of this video because I'm going to talk about two new developments in This data that we wanted to share is called the Buffett zone, what you need to know about two is called the danger zone and we'll get to that at the end of this video, but in the meantime, this is what 4% is. The rule says you take the value of your portfolio in the first year and we're going to use a million dollars on this. I know it's a big number, but it's a round number and it's useful for an illustration.

Take a million dollars. and I take 4% of that initial year number, so $1,000,000 multiplied by my initial year's 4% equals $40,000. Alright, that's my starting amount. I'm going to withdraw now. I'm going to take the dollar amount of $40,000, the dollar amount of my initial. 4% and I'm going to be able to increase that for inflation every year and over time I have a high probability of not running out of money, so with 5% inflation and now I'm taking $42,000 a year. of the portfolio, this is how this study effectively works. I start with a percentage. I think that dollar amount is increased for any inflation each year and we see how long it lasts, that's what the second part of this is about and I'll give you the results in a second is that you should have a portfolio and baingan use the sp500 in the total of ten total returns to bonds from stocks and 10 year bonds, but it is very important to rebalance each year back to the original 50% in stocks, 50% in bonds and that is an important part of the equation as well and again I updated this study and that's what we'll get to in a minute because this was all done on the date of 1992 published in In 1994 we brought this to 2018 to help you understand this very important concept.

What starts turns out well. Bagan basically said that if he does it this way, four percent of 80 percent of the time his money will last at least fifty. years in some cases you practically lasted to infinity depending on the year you retired, in about 20 percent of cases you unfortunately ran out of money because it was a bad time to start taking money out of your portfolio when it comes to the market. The next part of this equation is that we wanted to update this data or what is really the last part of this is that in the worst case the bank money lasted 35 years, so in most cases 50 or more with most retirements are not 50 years at worst, 35 years, which again is all, there is still a lot of time left in retirement.

We updated that study, so my team of CIA capital ship advisors said, look, let's take all the data back to the 2017 data, which is what we have. then make some assumptions just like baingan did because if we're going to go 50 years, if I retire in 2000 and I'm doing a calculation, I have to see if this is the money that will still be available in 2050, so we have to make some assumptions about future hits they did the same, so we wanted to recreate the studio and we did. We added all the years before 1992 through 2017, so we added a bunch of years that gave us 82 different data points. study 82 retirement life cycles to study the next important part of this is that instead of using a full ten percent, this is what baingan used their assumptions when they ran out of real data in the future, they basically used 10% for stocks that were soon classified as future. 5% return for bonds with 3% inflation.

I thought it was a little aggressive and I wanted to reduce them in some cases so that the planning that we are doing here is even more conservative than what the Bank did not do, so we used a The fifth that we actually use we use for stocks we use the five percent percent and for bonds we use two or one percent and I'll get to that in a second and for inflation we use three percent, so our assumptions for this future planning came down to trying to make this more conservative now this is what we go so again 82 years of data this is what we end up with seventy seventy percent of the time as close to what baingan did the money lasted fifty years plus a big 30 percent of the time the money it's gone 30 years earlier in the worst case, still 29 years, so almost still 30 years of your money is not reduced to zero, taking four percent of the first year's value and then increasing inflation each subsequent year , so we are effectively one that we are confirming that it begins.

The studies with real-time data are still relevant, they are much more up to date and the results are relatively the same, so the next point here is that I wanted to test a couple of difficult years of retirement, so we said what happens with the year 2000, right after 2000, we had a negative year or 2000, we had a negative 9% year, then we had a negative 12% year, then we had a negative 22% year, all in a row. Imagine retiring right before that, not only you withdraw money. but their portfolios fall and fall and fall well, if we again use our more conservative assumptions in years after the 2017 data, we use 5% for stocks, 1% for bonds and 3% for inflation in the year 2000.

In our scenario, here is some money. difficult time to retire the money still lasted 41 years 41 years it's important to know how about 2008 right you don't need another year really very difficult 2008 the money still lasted 39 years using those really low conservative market assumptions now we also look at this said hey wait What about five percent? Well, five percent if we don't use inflation, so if we use inflation at zero, it's quite interesting if again we earn five percent of a million is fifty thousand, so we keep that constant, well, that money lasted in our scenario Sixty-five. years now for these two really important new developments when it comes to retirement planning one I call the Buffett zone one I call the dangers in the Buffett zones good news and I named him Warren Buffett because his total return for his Buffett for his Berkshire Hathaway is over, it's about 2.4 million percent, I know it's not a misprint, 2.4 million percent compounded since he started in the mid-1960s, notable, hence the name of the buffet area, that's what the buffet doesn't look like, if we're looking.

On a chart of your money, what happens here is that if we start at this level, because let's say you get a couple of good market years right off the bat, what happens to your money is you almost get this infinity pattern. And why is it doing so well? It does this because if you have a couple of really good years at the beginning of your planning and the markets go up 8% 15% 30% then all of a sudden you have a bigger base to work from now on, your million could be a million. four, but you're still only taking about $40,000, maybe a little more with inflation, so now you really only need to take about 2% of your basis now to get that original 40. 45 thousand dollars, so it becomes very easy on the wallet with little stress, suddenly you get this compounding effect that we call the buffett zone and that's what ends up happening to your money.

This actually happened if you retired in 1955. You ended up with a tremendous amount of money for the year 2000 and 17 to the tune of close to a hundred million dollars and it's only because the timing worked out almost perfectly now on the other side of the equation. danger zone here the road to the danger zone is when things are going in the other direction and you have a really rough start for your portfolio number one and number two, you get a lot of inflation, so now you're forty years old, in a couple of years you will have to take 50 and then we are building on 50 we have to take 60 now we are taking 80, suddenly that puts a lot of stress on a portfolio that let's say at a bad time it didn't work out well to begin with, now suddenly it is instead of have to withdraw 2% a year to get what you need, you are withdrawing 6% a year because, again, it takes 6% of the corpus to get to the inflation adjusted number you need and this is what happens, it's almost the opposite in the end.

We run into this decline effect where you end up with very, very little money or you run out of money very, very quickly and this is what happens, this is the danger zone. Now we talk about a couple of different things, we talk about the importance of I'm trying to understand and stay on this for the current percentage initial value and then maintain that number for inflation. If we get to the point where we are now taking six or more from the wallet, you are in the danger zone. you are very likely running out of money long before you retire or long before age 50 and potentially much earlier than you want when you retire, so we and we also know that in the buffet area and the other side of the equation is you. have a couple of good years, that puts a lot less stress on your portfolio, but the reality here is that we wouldn't do it in retirement, it's not linear and we don't stay exactly on the same path, it's dynamic and decision basis you say In a given year, you re-evaluate and say, hey, wait, 40,000 was good, we still need to only need about 40 42,000 and we've had a couple of great years, well, maybe you can take some of the X and maybe renew he cooks or you take a bigger trip than you would have taken or an extra vacation and that's the nature of withdrawal rate planning, if you have a tough couple of years on the market you may have to reduce the rate a little bit. scale and leave. less than that 4% withdrawal rate or that 4% number, so the point here is that and we've done a lot of research on this, staying around that initial dollar value of 4% relative to the portfolio, that's the key every time it starts to go higher than that. to meet your needs 6% more you get into trouble you will have to scale back if the opposite happens and things are going very well then maybe you can move on and that is the key here to understand that this is a fluid process and dynamic that you must go through every year as you plan for your retirement and it is very important.

I would appreciate it if you would share this with your friends. This is something important. Share it with your parents. Share it with your parents. friends, your colleagues because our team has updated the 4% rule and I think it's really important information for you to understand as you move forward in your retirement planning, so with that thank you, of course, you can find me at West Moss Comm, those emails. there is an email button, those emails go directly to me on the team, happy to help you with your particular scenario in planning aas it gets more personalized and complicated, and of course we'll be happy to answer those

question

s.

Otherwise, I wish you a profitable day, thank you. a lot to tune in