Transcription
You're going to like this video. Why? Because I believe that somebody retiring with $600,000 has a decent chance of not only that amount of money being sufficient for their retirement, but actually a pretty good chance of it growing to a significant sum, maybe as high as $2 million or more. And the math and the reasoning works the same whether you've got $600,000, $800,000, a million, $2 million, whatever it is. And the reason for this is I believe the 4% rule is overly conservative.
So, let's jump in. I'm going to first start off and show you a case study where I run the math. You can follow along because I'm going to use a free online tool. Then I'm going to share with you a study that was done by one of the thought leaders in my industry. I used to be a retirement adviser before I retired myself and this is one of the thought leaders in the industry. And then I'm going to close actually sharing with you what the person that came up with the 4% rule thinks of this as well.
So let's jump in. The free online tool I'm going to use is called honestmat.com. You can tweak this for your situation. I like this tool because there's there's only four sections. Super high level. Don't retire on a tool this high level of a tool, but it's good to illustrate the idea. It's good to give you an idea of where you're at. Okay?
So, one of the four sections we have to fill out is personal information. Instead of a name, I'm just saying this is somebody with $600,000. They're married. They they're 67 years old and and they're already retired. They're at their full retirement age for social security. Their social security between the two of them are going to be $4,000 a month. That's about the average for a married couple.
Now, their portfolio is the next section. Uh I put in the $600,000. I leave everything else as the defaults. I should say that the asset allocation here is really key. So, you want to look at that and make sure it's a good asset allocation for you. I left the defaults here, which is 60% stocks, 40% bonds. That's a reasonable allocation for a retired person. I should say nothing in this video is financial advice. I don't know your situation, but I've seen hundreds and hundreds of of retired people, probably thousands retired people's asset allocation, and this is a reasonable one for for many situations. Okay.
The next category is expenses. Now, I've got them spending $5,000 a month. So, they have $48,000 coming in from so uh social security. Um, and then on top of that, they've got the 4% that they're going to take out of their portfolio. They're going to adjust that every year for inflation. So, that's going to be another $24,000. So, they have a total of $72,000 coming in, which would be $6,000 a month. So, why is it 5,000 a month? It's 5,000 a month because this tool takes taxes into consideration. Down below, you can adjust that, but this is what the default is. So, that's what I put in.
And then for the settings, I just leave the settings, everything as the default. This is where the honest math puts in the assumptions for what type of returns people get based on, you know, in stocks and bonds. Be careful adjusting things here. too optimistically because you can make any plan work. That's not what you want. You want a realistic plan and this is within the realm of reason for me. Okay.
So now I'm going to show you the result and I'm going to share with you why I believe that somebody retiring with $600,000 30 years later has a decent chance of of that growing to $2 million or more. Before I get there, I do have a request. If you enjoy insights like I'm sharing in today's video, my clients used to pay thousands of dollars a year for them. I'm delighted to be able to give all of these ideas away for free on on YouTube. The only thing I ask is give me a like. Think about subscribing. I do want to grow the channel. I do want videos like this to reach a wider audience. And you subscribing and you giving it a like and a thumbs up helps me do that. Okay.
So, what's the results here? Okay. Um, and so let me share with you what we're seeing here. This is the result of a Monte Carlo simulation, which is just a statistical tool to kind of simulate, you know, you and I have one life to live, but what if we had 10,000 lives to live and we got different stock market returns along the way, including sometimes where we got at the beginning we got good stock market returns and also times where we got bad stock market returns. If you get bad stock market returns early on, it's called sequence of return risk and it can hurt you. So everything in in these 10,000 lives is the same except for the stock market returns when you get certain returns. So the top of that pale blue line, these are for the people that were fortunate, they got strong returns early on. The bottom of that uh pale blue area or the people that got unlucky and then that dark blue line is the median. So you can see the medium person. So half did better, half did worse. Actually ends up with a little less than 600,000. But you can see the top of that pale blue line. Now that is the beginning of the 20% lucky. So there are people that go beyond that. So you can see the top of that is about $1.25 million. And in that uh 20% range, there will be people that are getting $2 million.
So, what's the likelihood of this happening? Getting, you know, as as uh my title says, somebody with $600,000 uh 30 years later having $2 million or more. For that, I'm going to switch now and go to this thought leader that I mentioned earlier, Michael Kitsus. He wrote an article called the ratcheting safe withdrawal rate, a more dominant version of the 4% rule. And here's what he says. By applying the 4% rule, over twothirds of the time, retirees finish with more than double their wealth on top of spending that 4%. Um, so that's twothirds of the time, but wait until you hear what happens half of the time. Um, again, if you haven't subscribed, give me a a quick subscribe or a thumbs up, but half of the time, wealth is nearly tripled by the end of retirement. So somebody with 600,000 uh ends up with $1.8 million. So that's where I got the $2 million. So half of the time, so the chart that I showed you, it does is these are different studies. So this is actually what Michael Kits is talking about is what happens in the real world. They're looking at real results. What I shared earlier was using that statistical model that I was talking about. Um, and you can see here, this is the rolling 30-year uh withdrawal rate that would work going back all the way to the like 1870 and looking at rolling 30-year periods. And Michael says that the average initial withdrawal rate that would have worked was over 6%. And here you can see what it looks like following the 4% rule. Um, and that dark blue line is not zero. That's the initial starting amount in this case. Michael has the example of somebody retiring with $100,000. And Michael says, "In only 12 out of the 115 rolling 30-year time periods going all the way back to 1870 did a retiree end up with anything less than the original amount that they retired with." Let me say that again because it's so important. And only 12 times out of 115 did anybody end up in in the real world looking at real data, not statistical data. Did anybody end up with anything less?
So that's using that study. Uh I'm going to show you another uh study by u the world's largest money manager and what they saw from deposits of their clients. What did they actually see in the real world? Before I do, I want to share that that honest math tool that's a high level tool. I think we all should have a strong financial plan, a strong retirement plan, the gold standards to work with a financial advisor. If you want to build your own financial plan, don't use a tool like honest math to go deep and to make the decision, do I have enough to retire or not? For that, you want to have a more robust tool. The tool that I like is called Balden. used to be called New Retirement. You can sign up for it using the link here. If you use this link, you will get a two-week free trial to the full Balden um package. And I'm an affiliate of the CH of Balden, so you'll be supporting the channel. And I like Balden because I think it's powerful, it's easy to use, and it's affordable. Okay.
Getting to this money manager uh report. This is by Black Rockck. Again, they're the largest uh money manager in the world and their reports called to spend or not to spend. And I want to draw your attention to one key chart specifically. I want you to look on the right hand side here. And what we're looking at is uh this is the percent of assets remaining after 17 to 18 years into retirement. The far right shows what percent of people have 100% of what they retired with or more. Now, we don't know what kind of spending habits that they used, but it's about 40% of people had 100% of or more of what they retired with 17 or uh 18 years later, and then another 10% 8 to 10% had 80 to 100%. So, not only does the Monte Carlo say that there's a decent chance um that you can end up with with significant money 30 years later, not only does the thought leader uh that looked at actual data say that, but now we've got a money manager that's looking at actual accounts.
So, now the question is, what does the inventor of the 4% rule think of all of this? The gentleman that came up with the 4% rule is a gentleman by the name of William Ben. He came up with that role in the 1990s. He just recently came out with a new book where he explores this and and kind of answers the question that I'm asking here. Is it too conservative? As a financial adviser myself, before I retire, I definitely think it's too conservative. This is his book. It's definitely worth reading because how much money you spend each year is a super important question uh to answer. If you can spend 25 or 33% or 50% more than you're planning on, that is huge. Or it may allow you to retire years sooner.
So, I'm going to point out one chart from this book. Again, I encourage you to buy it. But that 4% rule is based on 99.99% certainty. I don't know about you, but there's not many things in my life that give me a 99% certainty. For me, I'm okay. For me personally, I'm okay with 80% certainty because I know that we're humans. We're going to adapt. If if I find myself being in that unlucky crowd and I'm flying that plane down to the ground too quickly, you know what? I'm going to adjust along the way. So, this chart by Michael Kitsus, you can see here that uh 4% rule, that's the 100% likelihood of success. But let's go over and see what 80% likelihood of success is. So you can see he's got 84.4% and 75%. So it's somewhere that safe withdrawal rate according to William Ben is somewhere between 5.75% and 6%. Again not financial advice but I wanted you to know about it and to come up with your own financial plan which I think is really key. Remember the software I like is Bolden. You can sign up for it here get a twoe free trial. Um, and then finally, I want to share with you just some things about social security because it is such an important safety net. As I said, we're adaptable. So, how strong of a safety net is social security? For this, there's a Wall Street Journal article called You Don't Need to Be a Millionaire to Retire. It's written by this gentleman here, Andrew Biggs. I'm going to share with you who he is in a minute. But he goes on to say that one of the reasons that social security is so strong and as a safety net is that the average married couple, this was a few years ago, gets $46,000 a year in social security benefits. And that's up from around $34,600 a year in today's dollars since $2,000. And he says, "While hardly extravagant, a typical couple can expect an income more than twice the elderly poverty rate before they touch a penny of their savings." So that's why it's super important. Again, you might be able to spend more than what you're planning or importantly, you might be able to retire yours sooner than you thought. And that's why I made this video up here, why waiting to 65 to retire might be a big mistake. Thanks for watching this video. Bad guy.