In the last post “Is 2 Percent the New Safe Retirement Withdrawal Rate?”, we explored how some experts have knocked the conventional 4% retirement withdrawal rate in favor of figures as high as 7% and low as 2%. In conclusion, I demonstrated using a simple linear example how I thought a 3% withdrawal rate with an assumption of 6% growth was my personal preference. My reasoning was because it offered a high probability for steady returns and seemed to maintain portfolio integrity even after adjustment for inflation.
So what’s the problem?
• Rule of thumb calculations are okay for estimations. But in real life, they hardly ever play out the way they do on paper. Think about it. In our previous example, the portfolio always grew year over year by 6%. But portfolios don’t go up and up forever. And when they go down, they can have a bigger impact on your portfolio than you’ll expect.
When planning for retirement, it’s not just about how much you money you save up. One of the most important variables to consider is what’s called the safe retirement withdrawal rate – how much money you’ll withdraw each year to live off of. To take too much may drain your nest egg and leave you with nothing. To take too little may curb your lifestyle more than you’re use to.
For years, financial advisers have long proclaimed a safe withdrawal rate of 4 percent from your retirement accounts as the rule of thumb. That means you would have a relatively high chance of success if you start off by taking out only 4 percent and then adjust each year with the rate of inflation. But lately not everyone agrees, and the spread is more surprising than you think.
I am very glad to be home from western NY. This week MMD was on the road away on business for the latter part of the week. My apologies for not being able to post like I regularly do on Friday.
Mrs MMD and I have a lot to do this weekend. Our son turns 7 soon and we still need to buy his birthday presents. We’ve also got our hardwood floor project that we started last weekend to get done now that the last of the boxes we ordered have arrived. Thank you to anyone that selflessly posts “how-to” projects on You Tube. You have no idea how much help you have been!
If you believe at all in the January Barometer (financial-folk-lore that if markets do well in January, the year will be good), then we’re in for a great year! The S&P 500 is up approximately 8% this year and most of the economic reports seem to be more upbeat than they have been in recent years.
So what is there to worry about? Well, in the words of Warren Buffett:
• “Be fearful when others are greedy, and be greedy when others are fearful”.
Looking for Safety:
When my 401k dropped nearly 50% during the Great Recession, I decided it was time to stop playing offense and beef up my defense when it came to how I invest my money.
The first time I watched the Oliver Stone movie Wall Street 2, I was confused about something: Josh Brolin’s company, Churchill Schwartz, makes a ton of money when the company that Shia LaBeouf works for, Kellar Zabel (KZI), starts to dramatically fall in stock price.
Contrary to conventional investing, how is it that someone gets “rich” from stock prices going down?
How Shorting a Stock Works:
Although there were a lot of factors at play in the movie, the basic answer to this question is that Schwartz was “shorting” the Kellar Zabel stock. What does that mean? Let’s look at a simple example:
This has been one of those weeks where it feels like extra days got mixed in there somehow.
Mrs. MMD and I decided to celebrate Valentine’s Day early on Saturday night by going out to a local comedy club. If anyone is ever stumped on what to give someone as a gift, I highly recommend taking them to a comedy club. As long as you get a good comedian (which most of them are), it’s non-stop laughing for an hour and a half. On the real Valentine’s Day, we celebrated with our kids by having “Love Day” meal (which is a phrase they came up with). It consists of having spaghetti and meat sauce (I believe this is a Lady and the Tramp inspired cuisine).
I’m also happy to report that we booked our annual family vacation. This year is Playa del Carmen!
Unfortunately we never got our house appraisal like we were supposed to. Our refinance officer warned us that sometimes when they say it will take a week, they really mean two.