Our experience with retirees is that lifestyle and longevity are the major determining factors for evaluating the appropriate level of investment savings. While the rate of return is important, it is secondary to the annual spending need and concerns about outliving one’s savings. Following is a more detailed summary of these factors and other items to consider.

The Horizontal of retirement planning is related to the timeframe of your nest egg: “How much longer will you be able to invest in order to accumulate retirement funds?” versus “How many years will your funds have to last?”

For every additional year you continue to work and accumulate, you actually gain two years. This is because you are giving your investments an additional year to grow, plus that is one year less that you will be withdrawing funds. What this means for you is that the longer you can put off retirement (taking distributions from your assets), the higher the likelihood that your funds will outlast your life (if you are single) or the life of your spouse to pass (if you are married).

The Vertical is: “What percentage of your current income are you are spending, not saving?’ For example: if you are spending 50% of your gross income, with roughly another 30% being used for taxes, that means that about 20% is available to add to your retirement savings. The lower percentage you consume, you again get a “double benefit.” First, you are lowering the consumption level that needs to be maintained in retirement, which means you will need fewer resources in retirement to sustain that lifestyle. Second, this allows you to add the amount you are adding to your retirement savings and increase the overall amount available.

The 4% Rule

Recent academic studies have concluded that approximately 4% is a “safe” rate of withdrawal for retirement assets. This means that on a $1 million investment portfolio, a retiree can reasonably withdraw $40,000 per year initially, but then also increase that slightly every few years so that the investment portfolio can continue to grow, which will help offset the effects of inflation. Current rates of return and inflation, along with your base level of spending (income needs) ultimately determine how long your retirement nest-egg will last.

Start Small, and Take Incremental Steps

If you are living on 100% of your take-home pay, we recommend a bit of detective work to see where you are spending. Then, develop a simple strategy to take small, incremental steps to improve your “vertical.” If it seems impossible to save anything, start with $100 month. Then keep increasing the amount until you gain some traction. Over time, you will realize it is possible to improve how much you are saving, and at the same time, lowering your lifestyle to a sustainable level long term.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Arkansas Financial Group, Inc.-“AFG”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from AFG. Please remember that if you are a AFG client, it remains your responsibility to advise AFG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. AFG is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the AFG’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: AFG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to AFG’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.