Do you really need to save $8m. for a modest retirement? – opinion

“I exaggerate ourselves, our beings. I make fun of everything; of our life and what we are. But I don’t tell jokes, really. I just exaggerate life, and it comes out funny.” – Don Rickles

By AARON KATSMAN
Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
A few days ago my wife and I took our kids to Tel Aviv for a vacation day. We did a really fun graffiti tour of Florentin and then went to the Lehi museum. The museum is in that same neighborhood and is the building where Avraham “Yair” Stern was captured and killed.
After watching a video of the suicide pact between Meir Feinstein and Moshe Barazani, Jewish underground fighters under sentence of death (the two killed themselves embracing each other with a live grenade lodged between them hours before their scheduled hangings), I turned to my wife and said that from time to time we need to hear these stories. We are too often stuck in the rut of everyday life, and lose sight of those who made the ultimate sacrifice so that we can live comfortably in our homeland.
Then I got home and started to read the financial press, to catch up on what I had missed all day. And that’s when I stumbled upon an article about how much you will need to save to enjoy a “modest” retirement. According to Shawn Langlois of Marketwatch, you will need $8 million.
Yes that is right. Forget about everything you have ever heard or read. This is the new magic number! It also means that you virtually have zero chance to have a modest retirement. Nothing like a lot of financial drivel to bring you down from the spiritual high and solemnness of the museum to read some preposterous approach on retirement planning.
The claim is based on the fact that the 4% rule no longer applies.
What’s the 4% rule?
According to Schwab Center for Financial Research the rule is, “You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation. By following this formula, you should have a very high probability of not outliving your money during a 30-year retirement according to the rule. For example, let’s say your portfolio at retirement totals $1 million. You would withdraw $40,000 in your first year of retirement. If the cost of living rises 2% that year, you would give yourself a 2% raise the following year, withdrawing $40,800, and so on for the next 30 years.”
LANGLOIS BASES his thesis on the fact that interest rates are now at virtually zero, and as such there is no way that a 4% return is doable. He quotes the Financial Samuri blog to prove his thesis and writes, “Or you can use the 0.5% Rule as a stretch net worth target. To find out how much net worth you need to declare financial independence, multiply your desired annual expenses by 200. If you want to live off $40,000, then your stretch net worth goal is to accumulate $8 million.”
This approach eliminates using dividends and corporate bonds as a way to generate income. It would be pretty reasonable to assume that on $8m. you could pretty much keep the principal intact over time and generate more like $200,000 a year, with also keeping some growth as part of the portfolio. Look at it this way. On $8m., if the need is for $40,000 a year, just by leaving the money under your mattress, and no money invested, you would have, minus inflation, almost 200 years’ worth of money. And if your whole plans blows up, there is nothing wrong with taking some principal out to use.
This style of article is one of my pet peeves. It does such a disservice to readers who are trying to be financially prudent, and then realize that there is no way they will ever accumulate $8m. You have to ask, what’s the point?
As I have written numerous times, the way to answer the question of how much money you need for retirement, is first to figure how much you think you will need to spend on a monthly/annual basis. Then start adding up your pension, Bituach Leumi, Social Security for you Americans, and if you are short, then you need to tap your investments for supplementary income.
When figuring how much you can generate from your portfolio, the 4% rule is still applicable. If you need slightly more income than you can generate using CDs and bonds, it may pay to look at dividend-paying stocks as an alternative. If you are unsure of how to make the calculations or don’t really know to create that supplementary income stream, it may be smart to speak with a financial advisor who can help you achieve your goals and meet your financial needs.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel who helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call 02-624-0995 visit aaronkatsman.com or email aaron@lighthousecapital.co.il.


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