Posted by Philip Pent in on Jun 15, 2012
A Year ago, Bob (62) came to our office for a Financial Second Opinion. He had a mix of mutual funds and annuities with a total value of about $150,000. In his mind, Bob knew he needed to grow that money to $375,000 by the time he was 72, to fund a shortfall in his budget of $15,000.
He was going by an old rule of thumb taught by many money managers and brokers. It goes like this: If you have a nest egg and you want it to provide income for your retirement and you don’t want to run out of money, a safe withdrawal rate is 4%.
$375,000 x .04 = $15,000
The big problem? He needed a growth rate of 9.6% per year for 10 years to grow his money to his goal. The previous decade of the market had only done 2.23% and he had lost faith in the value of investing in mutual funds with asset fees of 1%.
2.23% - 1% = 1.23% (after fee)
Here’s where the problem was solved. Bob came in , and through a Financial Second Opinion, we showed him that he didn’t need $375,000. In reality he only needed to grow his supplemental nest egg to about $175,000.
The big question. Why? How? The answer: When you eliminate risk in your portfolio it is easier to promise higher pay-outs. Brokers quote a 4% withdrawal rate because they know your money is at risk and have to take loss of principal into account.
The pay-out Bob will receive at age 72 will be 7.9% for life. So if Bob’s account only grows to $175,000 he will be right where he needs to be.
$175,976 x .079 = $14,976
Bob came to us stressed and feeling behind in saving for his retirement. He left feeling relaxed knowing a larger portion of his savings was protected from the volatility of the market.
Go to paulpent.com or call 1-877-797-PAUL to schedule your Financial Second Opinion to see all the ways this type of planning can be used for your benefit.