Most Wall Street types say retirees can safely draw about 4% of their account out each year as retirement income.
So $1 million at retirement would mean about $40,000 a year in retirement income. They call it “the 4% rule” – although it’s really more a rule of thumb.
But why 4%?
If I earn 4% on my nest egg – and take 4% out each year, I’ll die with the same amount in my account that I retired with – and I will have spent my retirement years living well below my means.
Simple math tells me I could take out $64,000 a year and wouldn’t run out until I was 90 years old. Heck, if I could grow the undistributed balance at 6% instead of 4% – that figure would vault all the way up to $78,000 a year.
Turns out the 4% rule is a hedge against two big retirement risks; the possibility of needing large sums for nursing home, long-term-care, or medical expenses; and it hedges against the risk of prolonged, low investment returns.
To me – it’s all Wall Street hogwash – not because it’s bad advice or those risks aren’t real – but because there are better ways to mitigate – even eliminate those risks.
I have a number of retired clients for example, who earned 13% on their money last year with 100% downside protection against market loss. They many not earn 13% every year, but their downside protection is permanent and guaranteed. Besides, it would take a typical CD nearly 15 years to yield what these clients earned last year alone.
What’s more, the same vehicle that gives them that kind of investment performance also provides them – at no additional charge – a separate long-term-care type benefit that often exceeds $10,000 per month.
The result is that those with the same $1,000,000 retirement nest egg are living on more than $80,000 a year – and you can imagine the lifestyle difference between $40,000 and $80,000.
The icing on their cake is that their $80,000 is also tax-free – which means their social security benefits are not taxed – unlike those of their Wall Street counterparts. That makes the income gap is even wider – and that’s a whole bunch of extra bingo cards!