The Financial Survival Guide to Retirement

1
The Financial Survival Guide to Retirement

• Retirement Basics

2
Review

• What are possible alternatives to the 4 Rule?
• What are their strengths and weaknesses?
• What is the effect of using annuities?
• What do you like and why?

3
How Does Your Strategy Look?

• Using Retirement Quant, put in your financial
  data
• Include pensions and Social Security
• Evaluate the results
• Do you like the success rate?
• Do you need to improve it? How might you?
• Can you withdraw more?
• Whats your plan if things go badly?

4
Predicting the Future

• Prediction is a tough thing
• What is needed to predict whether you have
  enough money to last your retirement?
• How much money have you saved?
• How much will your savings grow?
• How much do you need to live on?
• How long will you live?

5
Fundamental Questions

• How much money have you saved?
• Include all your investments
• Do not include your home
• How much will your savings grow?
• For now, assume broad historical return
  statistics
• Well cover more in weeks 3 and 4
• How much do you need to live on?
• Some advisors suggest 80 of your current income
• Safer to assume youll need 100
• Well introduce rules later
• How long will you live?
• Potentially big problems if guess is too low
• Safer to assume something like 99

6
Which Scenario Results in the Most Money after
Six Years?

• Scenario 1 annual returns
• 15, 7, 6, 3, -5, -10
• Scenario 2 annual returns
• -10, -5, 3, 6, 7, 15

7
Answer

• They have the same result
• Total gain is 14.9
• For accumulation, the order doesnt matter
• In retirement, the order matters a lot!

8
Why Timing Matters in Retirement

• Assume withdraw 40k at the beginning of each
  year.
• Scenario 1
• Scenario 2

9
Be Conservative

• There are no do-overs in retirement
• If something doesnt go as planned, you have to
  live with the consequences
• Consider the Sleep at Night Factor
• You dont want to worry every day about your
  retirement
• You should enjoy your retirement

10
Forecasting Methods

• Start with assumptions of savings, income need,
  and life expectancy
• Several different ways to model future returns
• Use past 30 or 35 year periods
• Use random years from the past
• Use random returns from statistical distribution

11
Monte Carlo Simulations

• Assume statistical distribution of returns
• Need to deal with inflation
• Need to handle correlation of returns
• Each year do a random draw for the returns
• Simulate each year of a lifetime
• Simulate many lifetimes
• Pros
• Not tied to what happened in the past
• May have rare but possible events
• Cons
• Not all simulations are equally probable

12
Simulation Warning

• No simulation is a prediction
• No model gives a probability of success

13
4 Rule

• The most basic of savings withdrawal rules
• Withdraw 4 of your saving in the first year
• Increase your withdrawals by inflation
• Pros
• Easy
• Simulations show 80-85 success rates
• Cons
• Too simple

14
Lets Get Started

• Many retirement calculators
• Vanguard
• T Rowe Price
• Fidelity
• Retirement Quant
• Software written by me, originally for me
• Used for my retirement financial research

15
Online Calculator

• T. Rowe Price calculator
• https//www3.troweprice.com/ric/ricweb/public/ric.
  do
• Assume
• 1M in savings, no pension
• 15K/yr from Social Security
• Age 60
• Try to answer
• Will the money last your lifetime?
• How long might you have to work?
• How much do you need to retire when you want?

16
Homework

• What is your income?
• Total your investable assets. (Not your home)
• What are they invested in? By percent.
• What is the percent in stocks? Bonds?
• What is your average tax rate?