When Will My Money Run Out
A couple of years ago in its annual report, the Transamerica Center for Retirement Studies showed that—for just over half of the Americans surveyed—running out of money before running out of life was their greatest fear.
If you’re nearing retirement (or already retired), that can get stressful: it conjures up nightmare scenarios of having to rely on your children or—worse yet—having to go back to work. It gives you an added element of empathy for those Walmart greeters.
Unfortunately for many, it’s a valid concern.
The 2019 Federal Reserve Survey of Consumer Finances (the most recent available) shows that Americans aged fifty-five to sixty-four have an average of just over $400,000 in retirement savings. This below savings balance means that—with living expenses of $50,000 or so per year—these folks could be relying on nothing but Social Security within a decade of retiring.
Worrying that you’re going to live too long is the last way you want to spend your golden years.
I’m sure it comes as no surprise (in fact, you may have Googled and seen future results for yourself) that plenty of online calculator apps claim to be able to calculate the answer to the question, “When will I run out of money?”
Of course, you won’t find the correct answer in one of these apps. There are far too many examples of folks who thought they were set and discovered they were wrong.
The correct answer is—you guessed it—it depends.
It depends on your health. What happens if you have a major medical event and require long-term care?
Are you prepared?
It depends on how you plan (or fail to plan) for taxes.
It depends—if your portfolio is directly tied to the market—on the consistency of the Dow Jones or S&P (that dreaded volatility we discussed earlier).
And it depends—to an extent that may surprise you—on timing.
Rate of Return, Sequence of Returns, and Cash Flow
In chapter 1, we talked about how radically things change from investment return from pre-retirement (the Accumulation Phase) to post-retirement (the Distribution Phase). There’s no better example of the perils of this stark contrast than in what’s called the Sequence of Returns Risk. As the name implies, it’s all about timing investment returns.
Let’s say you begin retirement with an investment of $1 million in total savings. Let’s say that over ten years this retirement account has an average growth of 4 percent, with a handful of dips interspersed among mostly gains.
It’s easy to think that at the end of the decade, 4 percent will be 4 percent. That it doesn’t matter so much in which particular years those losses and gains occur.
Au contraire.
Why does it matter? Because growth is based on how much money there is to grow. I like to illustrate it to clients (and prospective clients) like this: Say you’ve got $10,000 saved up and invested in the market. The market takes a 50 percent hit, which has happened before, so it will probably happen again. It’s easy to do the math. Your $10,000 has become $5,000.
You might say, “All right, it will go back up 50 percent. I’ll be fine.”
Wrong. Remember, you don’t have $10,000 anymore. You’ve got half that. A 50 percent jump in the market is only going to get you to $7,500. It will take a 100 percent rise just to get your balance back to where you started.
And that’s during the Accumulation Phase. If the drop happens after retirement, you have to factor in the amount of money you’re withdrawing every month to live. You have to factor in those unknowns that seem to crop up at the least opportune times. You have to factor in taxes and inflation and Social Security.
Now let’s extend this over years. As you can see in table 1, the timing might make all the difference in the world. Losses early in retirement can be disastrous. Depending on the sequence of returns, two accounts starting with the same dollar amount, the same amount, taking the same withdrawal amount, and having the same average return of 4 percent can have drastically different outcomes. Math can be mean, but it doesn’t lie.
Annual returns over 15 years depending on market timing
What all this shows us is the importance of cash flow, and understanding that it’s easier to boil it down than to build it up. A lot easier.
More Than One Kind of Money
Not all money is created equal.
In the financial world, money comes in four basic varieties: pretax deductible, pretax nondeductible, post-tax (nonqualified), and post-tax tax-free (Roth). We’re going to dive a bit deeper into those in a later chapter, but I’ll tell you here that each type of existing savings can have its benefits and drawbacks. And each has its place in a broader and more effective retirement strategy.
A good retirement planner (again, preferably a Certified Financial Planner™) understands like the back of his or her hand the different types of money, rates of return on investments, sequences of return, and cash flow. They’re experienced and knowledgeable in creating a plan based on your specific financial situation and goals—whether you’re on the verge of retirement and just want to make sure you won’t wind up living with your kids or greeting customers at Walmart or you think that—just maybe—you can retire early.
It’s all a matter of having the right plan.
About the Author
Jason Glisczynski, CPWA®, CFP®, CAS®
CERTIFIED FINANCIAL PLANNER™ Professional
Jason specializes in helping individuals with planning for retirement and has nearly 20 years of advisory experience, is a Certified Private Wealth Advisor® professional, CERTIFIED FINANCIAL PLANNER™ professional, an Investment & Wealth Institute® member, and author of the International Best Selling Book Planning with Purpose: Solving Your Unique Retirement Puzzle.
Jason Glisczynski is co-owner and principal advisor for Silvertree, LLC. Investment Advisory Services are offered through Brookstone Capital Management (BCM) LLC, a Registered Investment Advisor. Silvertree, LLC and BCM are separate companies.