What You Must Know Before Investing

Every “retirement calculator” I’ve come across from any financial firm always begins with you assuming an investment rate of return you either want to earn or think you can earn.

This completely puts the cart before the horse. It’s what gets so many people into trouble at this critical stage in their lives, and what causes so much confusion and anxiety.

Once you’re past the first steps in The Relaxing Retirement Formula™ and you know just how dependent you are on your Retirement Bucket™ and how long it must last, the next question is, “what investment rate of return do I need to earn to make my Retirement Bucket of investments last?”

I’m now in my 32nd year of coaching individuals and couples through this challenging transition, and I have yet to meet one couple who knew the investment rate of return they must earn in order to make their Retirement Bucket of Investments last before we met. Not one!

This is not chosen arbitrarily. It’s the investment rate of return that allows your Retirement Bucket™ to keep pace with inflation and remain intact year after year while you to continue to spend what you want.
And, it’s different for everybody so there are no accurate “rules of thumb.”

Why This Rate Is Different for Everybody

To illustrate, let’s revisit our two couples, Mike and Mary, and <strongRon and Rose, both age 62. To keep it simple using round numbers, assume each couple has:</strong

  • $2,000,000 built up in their Retirement Bucket™,
  • the same social security retirement income of $3,000, and
  • the same monthly pensions of $3,000

Beyond that, here’s what else we know about them:

Mike and Mary have no mortgage or home equity line of credit, and they have recently completed many major upgrades to their home, i.e. a new roof, indoor and outdoor paint, a new furnace, new kitchen countertops and cabinets, and new bathrooms. They purchased new cars with cash in the last two years which they plan to drive for ten years.

Ron and Rose still have $300,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions, weddings, cars, and a condo down in Florida they bought a few years back. They both drive high end cars which they replace every three years. And, while their home is very nice, after 26 years, it is starting to look “tired” and will need significant upgrades in the next two years.

Ron and Rose are clearly more dependent on their Retirement Bucket™ than Mike and Mary, meaning they need to withdraw a lot more money each month to support their more expensive lifestyle, i.e. $9,500 per month vs. $6,500 per month.

In order for Ron and Rose’s Retirement Bucket to remain intact for the rest of their lives, it needs to grow faster just to remain full so they don’t run out of money.

  • 4.0% per year: Mike and Mary’s minimum investment rate of return needed
  • 7.2% per year: Ron and Rose’s minimum investment rate of return needed

There is a significant difference between having to earn 4.0% per year vs. 7.2% per year! And, this is why generic “rules of thumb” like 100 minus your age are so dangerous at this stage in your life. It’s impossible for that to be the correct formula for Mike and Mary and Ron and Rose.

Given this, Ron and Rose’s Retirement Bucket Strategy has to be very different than Mike and Mary’s!

When you’ve reached the stage where the money you’ve saved must now support you for the rest of your life, when you’re dependent on your Retirement Bucket™ to “live” as opposed to receiving a paycheck from the work you do, you have to think very differently about how you invest.

Investing without knowing the real rate of return you must earn first is like having invasive surgery without being thoroughly diagnosed first.

It doesn’t make any sense.

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