Will You Outlive Your Nest Egg?
As Generation X approaches its retirement years and the Baby Boomer generation is in the midst of theirs, this question should be on the minds of millions of Americans. The answer to the question is not quite as simple as some of the “rules of thumb” out there. For instance, the “10% Rule” which suggests saving 10% of your income annually may not work for someone who waits until age 40 to start saving. Similarly the “4% rule” which theorizes that you can withdraw up to 4% of your investment portfolio safely, is an old rule based on assumptions that no longer hold true, such as bonds paying higher rates. Finally, the myth that seniors should not invest in stocks could prove fallible if the return they do have in the portfolio does not keep pace with the rate of inflation.
More important than why the above mentioned rules of thumb may not work, is that every situation is unique. What works for your neighbor may not work for you and vice versa. A good financial planner will not rely on rules of thumb alone, but will take your individual goals, resources and risk tolerance into account.
If you are approaching retirement, chances are that you have a pretty good idea of what your spending needs are, and you may have even accumulated some savings. Your financial planner should take a snapshot of where you are today, compare that snapshot to your goals for the future, determine whether those goals can be accomplished on your current path, and if not, work with you to straighten out the bumps in the path. If you are in the midst of retirement, it is just as important to evaluate your current path and determine whether the path leads straight to a successful retirement or veers off in an unpleasant direction.
The current snapshot should include an analysis of your income sources, including whether those sources increase with inflation and provide a survivor benefit for your spouse if you are married; your annual spending and savings; the amount and allocation (stocks vs. bonds) of your investment portfolio; and your risk tolerance (how you feel about the prospect of your portfolio’s value dropping). Based on how your investment portfolio is allocated, an average rate of return can be estimated. Taking into consideration that rate of return, how much you need to withdraw from your portfolio to supplement your income, and your life expectancy, your financial advisor can calculate whether you will run out of money before the end of your life.
This “straight-line” approach has its limits, however. It assumes that your portfolio will achieve that same rate of return year after year. It assumes that inflation will remain the same year after year. We all know from experience that the financial markets do not behave that way. Just as important as how much the value of your portfolio declines or appreciates is the timing of such decline or appreciation. Many financial planners use a Monte Carlo analysis to more accurately predict the answer to the question: “Will I Outlive My Nest Egg?”
What is Monte Carlo analysis? It is a computer simulation that takes into consideration the allocation of your portfolio and the rate of withdrawal from your portfolio and runs them through a random number of trials (usually 1,000 or more). The simulation is designed to take all of the possible ups and downs in the market and the timing of the ups and downs to come up with a “probability of success.” The probability of success is based on the number of trials during which your portfolio runs out of money before the end of your life expectancy. For example, if your portfolio ran out of money in 200 of 1000 trials, you have an 80% probability of success.
If your probability of success is below the 70% to 90% range, you and your advisor have some work to do. There are a number of variables that could change the result. You may achieve your goals with a little less risk in your portfolio (or a little more risk); by spending less or choosing to take Social Security at a later age; by delaying retirement or saving more if you are still in your earning years; and by doing any combination of these things.
The Hook Law Center has two CERTIFIED FINANCIAL PLANNERS™ on hand and the resources available to help you develop a financial plan that is customized to your needs and helps you determine whether you are on the path to success or whether some adjustments need to be made.
Ask Kit Kat – Wildlife Land Trusts
Hook Law Center: Kit Kat, what can you tell us about the Humane Society of the United States’ (HSUS) wildlife land trust?
Kit Kat: Well, this is interesting. HSUS is an affiliate of the Humane Society Wildlife Land Trust which has 116 sanctuaries in the United States and Canada. The land mass covered is more than 20,000 acres. The best part is that all that land is safe from hunters. Recently, a wildlife researcher and rehabilitator, Alice Henderson, and Jason Patnode, a photographer and filmmaker, visited seven of the land trusts. The following is what they observed in 3 of the land trusts.
Allranch Wildlife Sanctuary, New Mexico, 1,280 acres – What is unique here are the bats. They spotted a greater bonneted bat, which has a 2-foot wingspan. This particular bat roosts in cliffs and has a call which is audible to humans. Other interesting creatures were horned lizards, and a bird (the loggerhead shrike) which is in decline due to habitat loss.
Demetriades Wildlife Sanctuary, Montana, 240 acres – This is one of the smaller sanctuaries, but it was teeming with life. They observed pronghorns (a deerlike animal with black horns), sandhill cranes, eagles, trumpeter swans, badgers, and moose. They also conducted a Bortle dark-sky test, which is a measure of darkness, or on the flip side, of light pollution. It had a very low score, which is a sign that darkness is being preserved. Darkness is helpful to migratory birds, because it helps them see lots of stars, which they use for navigation.
Meadowcreek Wildlife Sanctuary, Arkansas, 1,219 acres – Once again, bats were observed, but different species than in NM. Here is the home of the gray and Indiana bats, which are endangered. Also seen were the following: deer, coyote, river otters, whip-poor-wills, Eastern screech owls, and barred owls. What a wonderful mix of species!
We are indeed fortunate that HSUS and its affiliate, the HS Wildlife Land Trust, protect these wonderful species for all of us to enjoy! (“Trust in the wild,” All Animals, May/June 2018, p.28-29)
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