Too many young folks think retirement is so far in the future it does not merit current attention. From experience I can tell you that retirement arrives sooner than you realize, particularly if you are not properly prepared. Once more, check out The Golden Rule of Investing. If I want to scare myself into saving more I reread the following William Bernstein quote.
“Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble. Since a 25-year-old should be saving at least 10 percent of his or her salary, this means that a 45-year-old will need to save nearly half of his or her salary. Most 45-year-olds will find this nearly impossible, if for no other reason than the necessity of paying living expenses, payroll taxes, and income taxes.” Does anyone need more motivation than these words?
How do you analyze if you are in good shape and ready for retirement? If you are 45 years old and save $1,000 per month will the Bohr Portfolio permit you to retire at age 66? Assume inflation will be 3.5% over the rest of your working life.
QPP Projections: The following portfolio assumes the S&P 500 will grow at an annual rate of 7.0%. The Bohr is projected to exceed the S&P by nearly 100 basis points – our goal. We are taking on more risk at 15.9% as we prefer to come in under 15%. The diversification metric is a solid 43%. Can we make it through our retirement years with this portfolio?
Retirement Outlook: The Bohr Portfolio holds a little over $250,000 so I used that value for these projections. This 45-year old is saving $12,000 per year and expect to retire at age 66 and pull $60,000 per year from this portfolio. The following Monte Carlo calculation does not look all that good as this individual has a 50% probability of running out of money by age 84. Even the 10% probability of coming up short at age 73 is troublesome.
There are not too many options available to change this familiar situation. 1) Work longer. 2) Save more per year. This option has its limits. 3) Plan on living on less. This is possible if this investor will have a pension and social security remains sound. I have more confidence in SS than most folks I talk with as there is a very simple one line solution to Social Security. REMOVE THE CAP and do nothing else. Yes, this will impact the very wealthy, but they have been reaping the benefits of our twisted tax structure for many years. 4) Rework the portfolio to take on more risk. This could be harmful, depending on the market conditions at retirement. Shortly after I retired, I took a 50% hit (actually closer to 60%) with our portfolios. I did not panic and was able to weather the bear market even with rather risky portfolios. However, I don’t want to go through that again as I experienced four major bear markets over my investing lifetime. Now you may have a greater appreciation why I have a vested interest in the Momentum-Optimization Model (MOM) as a risk reduction plan of action.
Looking over the following screenshot, I recommend the Bohr Portfolio investor take some action to alter the probability of running “dry” before age 100, the number I use for life expectancy.
Photograph: The above photograph was captured at Ocean City, Maryland. I kept throwing bread crumbs into the bay and continued to shoot with my old fixed lens Olympus until I finally came up with an image close to what I wanted. You can see other bits of bread on the water surface.