Many people wonder if they are at risk to outlive their money. Nobody likes the idea of running out of money in old age. Based on 91 years of market history and some reasonable assumptions, if you have been doing a good job of saving for retirement, you should be fine.
Reasonable assumptions for investors
I recently came across an analysis that demonstrates this point and I thought I should share it. It calculated outcomes for investors every year from 1926 to 2017. In every case, investors would have had millions of dollars left when they died at age 95 after taking required distributions starting at age 70. Here are the assumptions:
- Everyone started saving at age 35.
- They saved at a rate of 8 percent of their gross earnings into a 401(k) account.
- They made $50,000 the year they turned 35 and they got a raise of 1.5 percent every year they worked.
- They invested the savings in 60 percent stock and 40 percent bonds or cash.
- The projection used indexes for the investments and covered four asset classes.
- 40 percent – U.S. large company stocks
- 20 percent – U.S. small company stocks
- 30 percent – U.S. total bond market
- 10 percent – Cash
- The account was rebalanced to these targets every year.
- The target allocation remained the same as the client aged.
- The projection used indexes for the investments and covered four asset classes.
- They kept working to age 70.
- They took only the Required Minimum Distributions based on the tax rules starting at age 70 ½.
World market averages for investors
This set of assumptions created 33 separate 60-year life spans. Each had a different set of real-world market returns. But as a group the averages look like this:
- The average return for the investments was 9.97 percent.
- The average savings accumulated by age 70 was $1.3 million.
- The average annual required distribution was $193,014.
- The average total of all the required distributions from the retirement fund was $4.8 million. (About 3.7 times the value of the savings at age 70.)
- The average savings balance at age 95, after 25 years of distributions, was $3.7 million.
When should I start saving for retirement?
The timing is important. If an investor begins to save at the start of a long market decline, they are likely to have lower overall growth for their investments. And the projection shows that timing matters:
- The smallest accumulated account value was for an investor who turned age 70 in 1974 was $860,000.
- The smallest distributions were for an investor who started taking distributions in 1961 and the average annual amount was $126,244.
- The smallest remaining balance was for an investor who turned 95 in 2008. The account value was $2.53 million.
Now, of course, your mileage could vary. There are lots of good reasons for your personal calculations to be different. You might have started saving earlier — or later. You might have saved at a more aggressive rate. You might not be able to work to age 70. You might live to be 120.
If you would like to get a solid picture of how a projection like this would look for your family, a great place to start would be to talk with a CERTIFIED FINANCIAL PLANNER™ professional. You can expect a multi-faceted approach to your financial goals that includes budgets, risk protection, retirement planning, investment management, taxes and estate planning.
And if the CFP® professional is ALWAYS an advocate for the client– a fiduciary advisor – and only works for the client – a fee-only advisor – you can be confident that the financial advice you get is focused on your best interests and is a good fit for your complete situation.
A CFP® professional can help you create a financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will get a meaningful understanding of your goal progress. And you will get a personalized action plan for how to move forward.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If you would like to know who likely you are to outlive your money, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.