Preparing For Retirement Requires Discipline

I wish I could show this post to every new graduate, be they high school or college.  The following three screenshots point out just how difficult it is to get ready for those retirement years.  In the first slide I lay out the assumptions for this investor.  In the second slide we have twenty index ETFs or a portfolio very similar to what one finds in The Feynman Study.  The third slide is a Monte Carlo projection showing the probability of running out of money at a particular age.

Assumptions:  This retirement example assumes an investor is 50 years of age, has saved $250,000, and invests $500 per month or $6,000 per year.  Retirement is projected for 2030 or at age 67 and the annual income in retirement is assumed to be $75,000.

There are two more critical assumptions.  1) The S&P 500 is projected to grow at 6% per year.  This may seem low, but it is better to be conservative than it is to deceive yourself.  2) Inflation is assumed to average 3.0%.  This is about half the current rate, but it is still quite low based on historical data since 1970.

Portfolio Projections:  The following portfolio is straight forward as 5% was allocated to each of 20 securities.  This results in a 65%/35% equity to bond ratio or not all that far from the very popular 60/40 ratio.  The portfolio is projected to return 6.25% or a little higher than the S&P 500.  Risk is very acceptable at 13.3%.  In a later run I will be more aggressive with the allocations as the Momentum Model is tuned in to reducing risk.  Even though we are invested all over the world, the Diversification Metric lies well below our goal of 40%.  A DM of 28% is nothing to rave over.

Retirement Projections:  While a savings of $250,000 looks good, here we see the bad news.  This investor his a 50% chance of going broke at age 74 or just seven years after retiring.  I want that 50% to only show up in the upper 90s or even at age 100.  What can this investor do to prevent this catastrophe from happening?

• Work longer.
• Save more per year.
• Increase the portfolio risk.
• Plan on living on less.

The options are limited.  If two investors were to live together and live on $75,000, this improves the situation.

Things may not be quite as dire as it looks in this example.  We expect social security to be around to provide income of around $1500 per month.  In addition, this investor may have a pension.  This retirement sample assumes the worker is making it with their own savings account.