Let me paint a visual picture for you. You’ve been looking forward to this trip of a lifetime, for your entire working life. You’ve scrimped and saved and finally today is the day. Your bags are packed. Your plans have been made. You walk down the corridor and enter the plane. You get settled in. You put your seat belt across your waist and look forward to the adventures ahead. The pilot turns on the PA system and begins making announcements for your flight. You listen halfheartedly, since you’re focused on the final destination. As you are listening, you hear the following phrase – “Today we’ll be flying at thirty-thousand feet and we have a ninety percent chance of not crashing. What do you do? Would you get off the plane? I would. Would you get off the plane? I would.
Here’s the deal. You very well might be buying a ticket to this scenario. We call it the retirement “withdrawal” problem. You have been taught your entire life, the importance of saving for this future trip we like to call retirement. You’ve saved in your 401(k) or IRA or Roth or pension program for years. You’ve filled the tank of your retirement airplane. You know what you want from your retirement. You know where you want to go. You know where you want to land. Yet, you might never have actually done the fuel verses destination analysis. Do you have enough fuel, meaning do you have enough money, to get you where you want to go? Have you calculated the possible headwinds? Have you calculated the time-zone changes? Are you gaining hours or losing hours? Have you calculated airport fees and destination charges? Have you calculated the possible increased cost of fuel during inflationary times? Are you traveling first class, coach or cattle-class? Have you calculated the cost of repairs of the plane? Are you carrying your own luggage or are you checking it at the gate?
Regarding the retirement trip, for decades the rule of thumb in the financial industry has been a fixed rate of liquidating four percent from your retirement accounts, at the start of retirement and then making adjustments annually for inflation. That was suppose get you to your destination. But now, future retirees will need to lower their withdrawal rates, because what worked in the past is unlikely to work in the future. The past thirty years have seen booming stock market returns and benign inflation. – a perfect economic environment to take a retirement ‘trip’; but, here’s the deal. We’re unlikely to experience those same conditions over the next thirty years. Some are saying that the new withdraw rate should be 3.1 %, which is actually a third less money and according to a recent article in Morningstar magazine. This formula still only provides for only a 90% chance of success, which is a 10% chance of failure. If you’ve been spending your whole life saving, perhaps now would be a good time for the “cash flow” talk to keep your retirement plane in the air. You don’t want to be flying “I hope this works Airlines”.
