9. When Can You Retire? Flashcards
(29 cards)
What is the main challenge associated with retirement planning?
Uncertainty about future spending, investment returns, and lifespan
William Sharpe called retirement the ‘nastiest, hardest problem in finance.’
What is The 4% Rule in retirement planning?
A guideline suggesting retirees can withdraw 4% annually from a balanced portfolio without running out of money
Developed by William Bengen in 1994.
How much can a retiree withdraw in the first year from a $1 million portfolio using the 4% Rule?
$40,000
This amount would increase by 3% each subsequent year to keep up with inflation.
What did Michael Kitces find in his analysis of the 4% Rule?
It quintupled wealth more often than it depleted principal after 30 years
Analysis covered data going back to 1870.
What happens if a retiree uses a 5% withdrawal rate instead of the 4% Rule?
They may run out of money in some periods within 20 years
This led to the recommendation of 4% as the highest safe withdrawal rate.
How is the Total Savings needed for retirement calculated using the 4% Rule?
Total Savings = 25 × Annual Spending
This formula derives from the 4% withdrawal guideline.
What is Annual Excess Spending in retirement?
The amount needed to cover expenses beyond guaranteed income like Social Security
Total Savings is then calculated as 25 times this amount.
What is the average annual spending decline for households aged 65-79 according to J.P. Morgan?
15% decline from ages 65-69 to 75-79
Spending decreases significantly in categories such as apparel and transportation.
What is the average annual spending for U.S. households aged 65-74?
$44,897
For households over 75, the spending drops to $33,740, a 25% decrease.
What does the Crossover Point Rule help determine?
The point when monthly investment income exceeds monthly expenses
It signifies financial independence.
How do you calculate Crossover Assets?
Crossover Assets = Monthly Expenses / Monthly Investment Return
This determines the amount needed to reach the Crossover Point.
What amount of investable assets is needed to reach a Crossover Point with monthly expenses of $4,000 and a 3% annual return?
$1.6 million
This is based on dividing monthly expenses by the monthly investment return.
How does the Crossover Point compare to the 4% Rule for a 3% annual return?
Crossover Point requires $1.6 million, while the 4% Rule requires $1.2 million
Both rules align if the investment return is 4%.
What is noted as a significant concern beyond financial status in retirement?
Physical well-being, mental well-being, and social support
These factors play a larger role in satisfaction than financial status.
What did Ernie Zelinski suggest about retirement happiness?
Many elements contribute to satisfaction beyond financial wealth
This includes mental and social aspects.
What did Kevin O’Leary express about the value of work?
Work defines identity and provides social interaction
He emphasized the importance of work for mental health and longevity.
What lifestyle questions should be considered before retiring?
- How will you spend your time?
- What social groups will you interact with?
- What will be your ultimate purpose?
True or False: The 4% Rule assumes retirees’ spending will increase by 3% each year.
True
Empirical evidence suggests spending may actually decline.
What is the primary consideration when deciding to retire?
It is a lifestyle decision, not just a financial decision.
What key questions should you answer to prepare for retirement?
You should answer:
* How will you spend your time?
* What social groups will you interact with?
* What will be your ultimate purpose?
What can happen if you don’t know what you will retire to?
You may be setting yourself up for a future of disappointment and failure.
What are the three areas of life that must be succeeded in retirement?
Mental, emotional, and physical.
What does the FIRE movement stand for?
Financial independence retire early.
Who is Terrence, and what is his experience related to the FIRE movement?
Terrence is a man who retired early and traveled as a FIRE nomad, but described his life as a ‘lonely existence.’
