Two news have caught my attention lately in the retirement world: How young people are expecting that inheritance will make sure they have money in the retirement phase; and, how the fiduciary rule can cease to exist.
Both of this articles worry me.
Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money.
– Jonathan Clements
First, you should establish your own plan for financial independence and retirement. Never put yourself in a position where you will depend on the kindness of others in order to pay your expenses.
Secondly, with multiple investment strategies available, I believe that investors have other options to traditional “professional fund managers”: Passive Investment and ETFs. Thus we now have the possibility to work on our savings an retirement investing strategy without paying someone to do it.
Save, Invest, Prepare the Future
Money might not buy friendship or love, but it can buy better health. People born today, especially in developed countries are expected to live at least to 100 (average). This means you need to:
Consider having at least 10-15% of your income saved towards retirements. If you have the possibility of your company matching this means you have to make only 50% of the work. If you save 6%, your employee can match another 6%. So your now saving 12%.
2. Social Security
The soonest you can file for Social Security is age 62 (US) and for each year filed early, there is a penalty 6%. (Source)
Nowadays, 72% of Americans collect at age 62. One of the secret gems that most people doesn’t use is that if you delay collecting until age 70, benefits will increase by 64%.
Most Social Security schemes around the world have secret gems. Learn about them and use it if you wish.
This is strange coming from a blogger that advocates FIRE, but if you’re not prepared for retirement, don’t retire.
3. Build an ETF Portfolio
Why spending money on fees to active funds, if they have poor performance when compared with the index that they aim to beat? Even if 20% of them beat the market, would you trust your instinct to choose the correct ones? (ScoreCard)
Well if you do, good luck.
PERCENTAGE OF LARGE-CAP FUNDS THAT UNDERPERFORMED THE S&P 500
Data as of Dec 29, 2017
Personally, I strongly believe in a passive investment strategy where savings are divided among one or two ETF, globally diversified, low-cost (TER < 0,10%), and liquid (AuM > 100 Million).
4. Be Careful with Inflation
If you retire at 65 and expect to live at least to 85, we’re talking in 20 years (minimum) where you can’t count on raises to match the inflation. Inflation erodes the purchasing power of portfolios.
Additionally, rising inflation has historically been a drag on inflation-adjusted stock and bond returns, making diversification and asset allocation very important take care.
If you start with $100 and have a 2% inflation rate (average) for the next 20 years, the purchasing power of $100 would fall by 33%, to just $67 by 2038. Careful!
5. The volatility of Mr Stock Market
One of the strategies that I’ve written here, is to decrease the % allocated to stocks, as your getting near the retirement phase. Why? Because the volatility in the stock market can be really scary sometimes. In 2008 the S&P500 was losing 50% of its value in the middle of the bear market. That’s the 500 biggest public companies in one of the most powerful and developed countries in the world.
What if you needed your money precisely in the middle of a bear market? You may be tempted to sell everything just not to risk any more of your precious retirement money. On the other hand, if you have a more conservative allocation to stocks (let’s say 70% bonds and 30% stocks), due to your age, you’ll be more able to resist that volatility. Thus more likely to keep the course and even buy more stocks to enjoy the lower price.
6. Emergency Funds
Want to have a peaceful retirement? Here’s another strategy: build an emergency fund with at least 12-36 months worth of expenses. Depending on your personal and financial situation of course. Set aside that money, and don’t invest. Even if a bear market comes, you’ll be more able to endure that turbulence with complete peace of mind.
7. Withdrawing Rate
Historical research suggests that limiting withdrawals to 4% is a good place to start, but this really depends on the strategy that you use. And on the money that you’ve saved. And on your asset allocation.
The sequence of good and bad market performance years may also have a major effect on your portfolio’s ability to sustain your income.
There’s no “one fit all” answer here, but there are a number of scenarios and possibilities:
- Returning to the workforce if something happens to your portfolio;
- Live only on your dividends/coupons/interest from the certificate of deposits;
- Live only on your social security money;
- Adjust your withdrawing rate according to market conditions;
- Be more frugal. Thus adjusting your lifestyle;
- Change to a cheaper country in retirement.
The point is you need to start preparing your retirement and financial independence sooner rather than later. Doing so will mean that you will have a plan to face any future event that can cause problems to your life. Whether you increase your margin of safety or adjust your lifestyle you’ll be ready to fully enjoy life.
The trouble with retirement is that you never get a day off.
– Abe Lemons
And you reader? What’s your retirement strategy? Do you have any ideas to add to this post?