How Much Do I Need To Retire? Dave Ramsey Answers … But Be Careful!

How Much Do I Need To Retire? Dave Ramsey Answers … But Be Careful!

How much do I need to retire? is a common question that I hear, and it’s a really important one. 

Recently, I was reading a blog from popular financial person Dave Ramsey, and he was weighing in on the subject of retirement. I think Dave helps so many people when it comes to debt elimination and figuring out the baby steps in saving. He does great work there, but when it comes to retirement planning, in my opinion, you might want to think twice about implementing some of the advice that he gives. I’m going to go over it with you today and why you might want to be careful and what you can do instead to put yourself in a better position

First of all, realistically, you don’t want to implement anybody’s advice without meeting with them and considering your specific situation. I would much prefer doing that versus listening to someone on YouTube, or somewhere else, on what you should be doing with your money. So, talk to someone that you trust. 

Anyway, as I was looking at Dave’s blog and what he thought about this, he says that if you’re able to live on 8% of your nest egg, and if your mutual funds can do 12%, you’ll have 4% to cover inflation. Okay; that makes sense – if you want to live on 40K, he says, you need $500,000 in the bank. So, take your total nest egg and divide it by 0.08 to get that number you’ll need to live on each month.

This is, in my opinion, a little bit risky. And here’s why: 

The Sequence of Return Risk

What this means is that someone who retires in 2007 and someone who retires in 2010 are going to have drastically different outcomes of their retirement. If they were taking the same amount and their investments did the same thing, the outcomes, because of the withdrawal rates, have a big difference. 

Applying this to our example: if you’ve got 500K and you’re taking out 40K, an 8% withdrawal, and you’re averaging 12% somehow, but let’s say it’s 2007 and then the financial crisis happens. What if the investments, because you’re invested aggressively, get cut in half but you still need 40K to live? Now you’re taking out 16% and that could really crash a plan, so that’s something to be careful about. 

Aggressive Investments

Regarding this idea of the 12% rate of return on mutual funds, if you’re achieving that sort of return, my thought is that you’d have to be invested pretty aggressively. Many people who are in retirement don’t feel comfortable taking that sort of risk and going along with the rollercoaster that comes with investing in equities – especially looking at 2020 and what happened in March – because there’s fluctuations that happen. 

People in retirement don’t always want to do that, so a lot of times we’ll bring up the three-bucket strategy as a possible retirement withdrawal strategy. 

Unexpected Expenses

Let’s look at an example of a 500K nest egg to start that first year in 2020. And in this scenario, achieving a 12% return and taking out 8%, that plan looks successful and you’re actually growing your assets in retirement; fantastic.

But what if you were off by 5K of expenses; what if you really needed 45K per year instead of 40? That’s a big difference that drastically impacts your plan. And what if you were right: you needed 40K a year. But what if instead of 12% you only got 10%, how does that impact the plan? Those are just a couple of reasons why you might want to be careful when planning and make sure that you talk with a professional to map it out and think of all the different scenarios. 

And if this isn’t the best way, then what is a good way to go?

  1. Decide how much you need each month
  2. Estimate how much you might be having come in from social security and other pensions, other guaranteed income sources, and then subtract that from the monthly amount in step one
  3. Take the number from step one and minus the number from step two, and then divide that number by 0.04, which is a more reasonable 4% withdrawal rate

But again, this is still basic. The 4% withdrawal rate isn’t bulletproof, it’s an opinion, it’s a financial withdrawal strategy out there. I recommend meeting with someone and specifically looking over your scenarios, just yours and not anybody else’s. A lot really depends on the money that you have invested and the withdrawal rate that you’re using. 

As advisors, we’ve helped hundreds of people plan retirement, and we know that the more specific you can get in your plan, the more peace of mind you’ll have in retirement. If you’re interested in more peace of mind, reach out to me and I can help create your streamlined retirement blueprint, or I can give you The Perfect Retirement Plan that can help walk you through steps to take for your own retirement plan. 

Three Common Myths About Planning for Retirement

Three Common Myths About Planning for Retirement

The thought of retirement tends to bring people peace and hope throughout their entire career. The thought of planning for retirement, on the other hand, tends to be overwhelming. The idea of lining up finances to get you to that point can seem like such a burden. However, we have found over the years that the most common problem that many people face when considering retirement, is they listen to all of the myths floating around out there. 

Before you get into the thick of the planning, it is important to first address and debunk a few of these derailing myths. 

Planning for Retirement is Complicated

Time and time again people overcomplicate their retirement plans. The truth is, your retirement plan should be simple enough that you completely understand it, and know how to best follow it. Otherwise, there is no way that it could possibly be effective. You are the main focus of your own plan. If your plan is designed to be overly complicated, it will not only be impossible for you to see benefit, but it may also be impossible for you to truly reap the intended benefits.

At Streamline Financial, we make it our mission to ensure that your plan is one that you can follow. We won’t help you to create a plan that only makes sense to us. Instead, we work to simplify the process for you so that you have a clear idea of the direction of your own future.

The Plan Must Be Extensive

Another common misconception that people believe about a retirement plan is that it has to be extensive. Many believe that in order to be prepared, they must dig into the tedious details, know exactly what they will want to spend money on every day for the rest of retirement, and budget for these specific expenses. However, what many don’t realize is a retirement plan does not need to be fifty pages long to be effective. In a sense, we have found that it is much easier to abide by the plan if you keep it short and simple, touching on the important things in a tangible way. In fact, we have found that most effective plans are only one page long

Your Retirement Plan Has No Room for Change

Lives are constantly changing. Your job may change, your family might change, and your overall retirement plan might change as a result of these other factors. Many people don’t understand that an effective retirement plan leaves room for this change. You are not locked into any restriction set in place. Your retirement plan can shift and grow as you do.

If you are hoping to plan for retirement soon, but feel overwhelmed by the complexity of it all, learn more about our effective one-page retirement plan. We are happy to work with you to debunk the myths and help you to create the retirement plan that works best for your unique lifestyle. Contact Streamline Financial Services today to begin planning for your retirement.