4 Strategies For A Successful Retirement

There are numerous strategies to safely spend
your money in retirement. I’ve already covered one of the most well-known
strategies in my video on the 4% Rule (and we’ll be briefly touching on it again since
I know a lot of you weren’t around back when I originally made that video and it’s
also the strategy against which we’ll be measuring the others), but it is by no means
the only strategy that has been put out there and depending on how deep down the rabbit
hole you want to go, it may or may not even be the best one for you, personally. Today I’m going to be going over 4 different
retirement withdrawal strategies and hopefully along the way we’ll find one that appeals
to you and your situation. Let’s get started. The first and arguably most popular retirement
withdrawal strategy that I want to talk about today is the 4% rule or safe withdrawal rate
strategy, which basically aims to get you to withdraw a certain percentage of your retirement
nest egg in the first year of retirement and adjust your withdrawal every year thereafter
to account for inflation. One bright side to this strategy is that,
so long as you stick to a conservative enough withdrawal rate, you should have a reasonable
chance of not outliving your money as I covered in detail in my video on whether or not the
4% is actually safe. Another plus to using this strategy is that
your buying power will remain the same throughout your entire retirement. Say John had annual expenses totaling $40,000
a year heading into retirement and he was going to follow the 4% rule for his withdrawals
in retirement. This would mean that he would need to have
$1,000,000 saved by the time he retires in order to live on that $40,000 per year. Over the course of his first year of retirement,
he would withdraw his $40,000. In his second year, he would adjust for inflation
(or just increase his withdrawals by 2% each year if you don’t know what the inflation
rate is going to be, which is what many people do when trying to simulate this strategy). Say inflation was 3% in his first year of
retirement that would mean that in John’s second year he would withdraw $41,200, which
would keep his effective buying power the same as what it was in his first year of retirement
before the inflation happened. This can go the other way of course if inflation
is actually negative over the course of a year, which doesn’t happen often, but does
happen once in a while. Say if inflation was actually down 2% in John’s
second year of retirement. If he was adjusting for inflation that would
mean that he would lower his withdrawal in his third year of retirement from $41,200
to about $40,400. In terms of how this strategy is graded using
the four factors of retirement (which if you don’t know are income, risk, stability,
and buying power I’ve got a whole video on them in the description if you want to
learn more) in my personal opinion the 4% rule is below average in income (dynamic strategies
that focus on this factor as their primary selling point are far better in this regard
than the 4% rule), roughly average to maybe slightly below average in risk (though using
the 3% rule can improve this score), and strong in both stability (thanks to its constant
adjustments for inflation and lack of freezes or reductions) and buying power (which is
where this rule shines the most in my opinion). The second retirement withdrawal strategy
I’m going to cover today is the fixed dollar withdrawal strategy. This is, exactly what it sounds like, you
begin by withdrawing a certain dollar amount from your nest egg every single month and
keep that amount constant throughout your retirement. Say if John were living on this strategy in
retirement. He still has $1,000,000 saved and still wants
to live on $40,000 a year, but this time there is not adjustments for inflation. He withdraws $40,000 in the first year of
retirement, $40,000 the second, and so on. When it comes to the four factors of retirement,
compared to the 4% rule this strategy is generally a little stronger on the income and risk side
of things while suffering a little more in the stability and buying power categories. The reason for this is that, as long as your
initial withdrawals are not too high, you are very unlikely to outlive your money on
this strategy, and you may be able to live at a higher standard of living, at least initially,
than you otherwise would have under something like the 4% rule. In fact, going all the way back to 1950 and
looking all the way to March of 2019, which is the most recent data I have at the time
of this writing, if John had his $1,000,000 invested in something like the S&P 500, he
would not actually outlive his money during any possible 20, 30, 40, or 50 year retirements
during that time span as long as he withdrew no more than $54,000 a year or $4,500 a month. As I said, this initially will give him a
higher standard of living than the $40,000 a year income he would have under the 4% Rule
would, though eventually, the inflation effect would catch up with him. So in terms of the four factors of retirement,
the fixed dollar strategy is above average in income and risk, but below average in stability
and buying power in comparison to the 4% rule. The third retirement withdrawal strategy that
I want to discuss today is known as the fixed percentage method. This works very similarly to the fixed dollar
method, except that you are withdrawing a certain percentage of your nest egg every
year. This doesn’t adjust for inflation, but it
does at least adjust with the value of your portfolio. Say John wanted to withdraw 4% of his investments
each year in retirement. Since the value of his investments were $1,000,000
when he retired he would withdraw $40,000 in year one of retirement leaving him with
$960,000 leftover. If his investments went up by 10% that year,
the value of his portfolio would be somewhere in the neighborhood of $1,056,000 at the start
of his second year of retirement and he would withdraw 4% of that or $42,240. The downside is that the reverse can also
happen. Say that John’s investments fell by 20%
the next year, bringing the value of his nest egg down to about $811,000 and forcing him
to withdraw $32,440 in the third year of his retirement. So as you can imagine stability is something
that this strategy has a very low score in given that the value of a nest egg (if it’s
invested in something like stocks) can grow or shrink by 20%, 30%, or even 40% from year
to year. The bright side is that assuming you’re
not withdrawing something crazy like 20% of your nest egg every year, your risk of running
out of money is theoretically very low. And I specifically say theoretically because
like many things it’s true only to a point. If we take it to a logical extreme this can
break down. Say if John had $10,000 and he wanted to live
on 50% of his nest egg each year for the next 5 years… He’d technically be fine in theory, but
how many of us are able to live on $5,000 a year? Not very many, but if you’re willing to
take the hit to the stability of your income in retirement, you usually can safely squeeze
out a little more than 4% of your nest egg each year in a typical retirement, it just
means that your average raw dollar income will shrink the further you go into retirement. To illustrate this let’s say that if John
withdrew 10% of his nest egg each year he would start out with a six-figure income given
his $1,000,000 nest egg, however, if he ended up living longer than he planned on he could
be living on what could only be generously called a shoestring budget in his later years. For example, in the simulations I ran covering
the various retirement lengths starting from 1950 onward, assuming John had invested in
the S&P 500 he would’ve had median monthly incomes hovering around $6,500 in 20 and 30-year
retirements, but that number dropped quite a bit as the retirements got longer. In his 50 year retirements, his average median
monthly income was about $4,400. Which admittedly doesn’t sound that bad,
but you also need to consider his final few years’ worth of monthly withdrawals, which
were about $2,300 a month on average during those scenarios which is considerably less
than the six-figure income he started with. Also remember, that’s $2,300 a month possibly
as much 50 years down the road. Once we adjust for inflation over that time
period it may not even buy John about what $1,000 a month would buy him today depending
on exactly how far down the road we are. So buying power could be taking a significant
hit if the initial percentages you’re withdrawing are set too high. So in summation, the fixed percentage method
scores reasonably well, though not necessarily elite, when it comes to income (particularly
early in retirement), great in terms of risk (assuming you aren’t too aggressive with
your withdrawals), horrible with stability (due to fluctuations in the value of your
nest egg), and below average in terms of buying power (unless you’re too aggressive with
your withdrawals, in which case it gets pretty bad over time). The fourth retirement withdrawal strategy
we’ll be covering today is the dividend method. The dividend method seeks to get you to a
point where the dividends from your investments cover all of your expenses. The plus side to being able to use this dividend
growth investing method is obvious when done right, you don’t have to sell any of your
shares of your investments to cover your bills. The downside is that you are, usually, less
likely to experience the kind of rapid stock appreciation we sometimes get during market
booms if the majority, or entirety of your portfolio is invested in these higher dividend-paying
stocks. This is because companies that are in what
investors call the “growth phase” of the business usually want to reinvest as much
of their profits as they can into continuing to build the business and as a result they
don’t usually pay out a portion of those profits in dividends. Often, though not always, when a company starts
paying a dividend it is because they feel the biggest part of their rapid growth phase
has ended. That doesn’t mean that they won’t continue
to grow as a company, it just likely won’t be quite as quick of a growth as it was in
the past. But that’s not really the point of this
method, we’re not quite as concerned with stock prices rising or falling because we
aren’t selling our stocks in the first place with this strategy. The point of this method is to minimize risk
as much as possible by investing in well-established companies that are paying out consistent dividends
(hopefully they also have a history of raising their dividends over time) that will cover
your expenses. As a result, the dividend method scores pretty
highly in the risk factor, is generally slightly below average in income (it’s rare, though
not impossible, to find those consistent, safe, and reliable companies, index, or mutual
funds that year in and year out pay much over 4% per year in dividends alone, especially
over the long haul that is the typical retirement), and both stability and buying power varies. Normally I’d say that stability is decent,
though not excellent (dividends do tend to grow over time, but there are going to be
instances where they get cut down particularly during major crashes. However since they tend to grow more than
shrink it’d consider it technically a net positive, but this does depend to a certain
degree on what investments you choose). And normally I’d say that buying power is
good since dividends growth investments usually do keep up with inflation, or at least very
close to it (inflation has historically averaged between 2%-3% per year and dividends are usually
in that ballpark as well, but again this does depend on the investments you choose to a
certain degree). So those are 4 more systematic withdrawal
strategies that people use to have an income in retirement, but they are by no means the
only ones out there, and depending on your situation they may not be the ideal ones for
you to use. Next week I’ll be going over 4 more retirement
withdrawal strategies that are a bit more dynamic in nature that may appeal to some
of you better if none of today’s strategies exactly jumped out at you.

16 thoughts on “4 Strategies For A Successful Retirement

  • Many people can not afford to invcrease their retirements every other year and so far that i see,a good plan B is to buy some real estate and rent it out,so its paid off by the time you retire and it will make you sifficent suplimental income.

  • 😳
    I watched all these videos about investing And still My question is “ what..how and where to start investing” 😭😞😖
    “Investing for dummies “😊

  • Or just create an income floor equal to your very basic living expenses. Example: social security and a pension/annuity/4 percent rule/rental income. Then invest anything above basic income any way you want. If the market is down you tighten your belt, if the markets up you can spend it if you need to. Being frugal and wise with your money will get you to retirement, why change once you retire?

  • Lots of info in this one. Although I'm well aware of the strategies in this video I had a hard time keeping up with some of the rapid fire examples. It's entirely possible that I'm just not feeling very focused though, so I'm just slow on the uptake.

    I think I've mentioned this before, but I'd love to see a more in-depth video on the dividend strategy. Is this one on your list of future videos?

  • I’m currently investing in real estate and the stock market. I think investments are crucial. Saving is good but the inflation rate is eating your money unless you put it to work

  • OR, hear me out…. You use that $1M to purchase 5 properties work 250k for 50% down and EASILY cash flow $5k monthly before taxes… About $4k after taxes. You still have $400k, in your account, so you can buy large diversified stocks or dividend stocks with half of that and you still get a $200k emergency fund in a high yield savings account while you live off of you $60k a year in rent and have tenants pay off your mortgage.

  • What about a strategy of growth stocks during the saving phase and shift to dividend stocks when you need to start withdrawing

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