The Losing Retirement Equation

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If you’re like most Americans who are contemplating retirement, you’re probably wondering how much you need to have saved up to retire. You want to be able to live comfortably in retirement, and to not have to constantly be worrying about whether you’re withdrawing your savings too fast. These fears are understandable, but if you listen to Wall Street’s advice, you’re bound to back yourself into a very dark financial corner from which there is no escape. Let’s explore what’s wrong with the losing retirement equation that Wall Street urges you to plan your retirement goals around:

The average baby boomer will live 20 years in retirement:

Although the average baby boomer will live 20 years in retirement, this is an average – you really don’t know if you’ll live much longer. The problem is that this real-life uncertainty does not fit neatly into the statistical models that Wall Street uses to promote its traditional retirement equation.

A baby boomer who lives 20 years can safely withdraw 4%:

Wall Street firms love to use a retirement planning technique known as the Monte Carlo simulation to set a retirement withdrawal strategy for retirees. If the average retiree lives 20 years in retirement, the Monte Carlo simulation predicts that for that retiree to have a 100% probability that he won’t run out of money prior to his death, he can afford to withdraw 4% of his retirement savings every year.

If you have $1 million, 4% is $40,000 a year:

Since most Americans seem to set $1 million as their retirement savings goal, the Monte Carlo simulation tells the average retiree that he can safely withdraw $40,000 a year, which is 4% of $1 million. Of course, $40,000 doesn’t seem like a lot to live on, nor does it account for the fact that you, as an individual, may not live the average 20 years in retirement.

You will be left with $1 when you die:

Even if you are the average American who lives exactly 20 years in retirement and even if you withdraw just 4% of your retirement savings each year, you still will be left with nothing when you die. You will not be able to pass on an inheritance to loved ones, including those who may have taken care of you and given you great joy in the final years of your life.

It’s no wonder that Wall Street wants you to plan your retirement withdrawal strategy around oversimplified predictions and average lifespans – it’s far easier for Wall Street to dole out the same financial advice to everyone than it is for Wall Street to consider that everyone’s circumstances are actually quite varied and unique. You need to stop listening to the nonsense that Wall Street is feeding you, as your goal shouldn’t be to be left with nothing when you die – or worse, to be living off Social Security and the generous charity of loved ones.

For more information about why you need to radically rethink your retirement strategy, visit Infinite Wealth: A Different Kind of Retirement.

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