Plus, Frank had a tough time financially during 2008. He watched his portfolio dwindle during the Great Recession. But now, his portfolio has bounced back in a significant way.
Here's where one of my favorite rules of thumb comes into play. It's called the 4% Rule, and at its core, it's simple but powerful. The 4% Rule says that a retiree can withdraw 4% annually of their initial retirement assets, and increase that amount every year to account for inflation. The rule assumes a 50% to 75% portfolio allocation to stocks. If you follow the rule, your money should last quite a long time.
Also, be sure to consider all of your sources of retirement income. Don’t discount your Social Security benefits. Today, these benefits average $1,400 monthly for single Americans. It’s not uncommon to see a couple bring in north of $3,000 a month.
Frank is ready to make some decisions. What do you think he should do?
If we apply the 4% Rule to Frank’s portfolio, we get $40,000 a year, which translates into about $3,300 a month. While he’s too young to claim his Social Security benefits right now, there is the question of when he should begin drawing his monthly checks. Remember, he can start as early as 62 or wait as long as his 70th birthday.
Say he chooses to begin his Social Security benefits at age 62, and they’re $2,000 on the dot, and his wife claims her $1,500 around the same time. In this scenario, Frank and his wife will have $6,800 of monthly income ($3,300 from investments and $3,500 total from Social Security), or $81,600 a year. After allowing for 15% in taxes, the tally goes to $5,780 in monthly income.
If Frank and his wife are like the happiest retirees I surveyed, they have either paid off their mortgage or are within five years of owning their home outright. (In fact, retirees in this situation are four times more likely to be joyful than their mortgage-carrying counterparts.)
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So, their monthly expenses would likely be low, making this income quite comfortable for the pair.
What's vital also is that Frank maintains the balance in his portfolio to navigate his retired years. You generally don't want to step away from work and be 100% in stocks. The risk is typically too high. As long as he keeps a well-diversified portfolio, he should be just fine. Diversification and asset allocation are insulation, in a sense: If the market takes a tumble, you're more protected.
Of course, there's always the question about when to begin Social Security. You don't want to start too early or wait too late. While there's no clear-cut answer for everyone, two things to consider are your income needs and your longevity. Because longevity is a crapshoot, I want to focus on the money piece.
If you want to retire early at age 62, for example, you may be facing two options. The first is to take substantially more than 4% from your nest egg (in the 6% to 7% range) until you begin Social Security. The second is to draw your monthly Social Security benefit “early.”
What to do? As a general rule of thumb, sign up for those checks sooner rather than later, particularly if you have stopped working completely.
Why? Because you don’t want too much pressure on your retirement savings too soon.
But if you can draw down 4.5% of your portfolio (slightly more than the 4% rule) and delay Social Security, that might be something worth considering. My opinion, though, is that if you’re on the fence (like Frank), taking the monthly benefit over increased withdrawals from your investments tends to make the most sense. Of course, everyone’s specific situation is unique to them, so weigh all options and be sure to speak to your financial adviser about what makes sense for you personally.
Frank will likely have enough money for a long retirement. The second question, though, is whether he has enough core pursuits, or hobbies that he loves and engages in regularly, to make it all the happier. My research uncovered that the happiest retirees engage in an average of 3.6 core pursuits. The unhappiest have only 1.9. So, how you choose to spend your time matters significantly when it comes to a fulfilling retirement.
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As for Frank, a study from a University College London psychologist, John Barry, in conjunction with men's grooming company Harry's, is directly on point here. This study found that men's happiness levels were tied to their job satisfaction over any other aspect of life.
So, men, if you’re going to step away from work, consider stepping into a core pursuit that can give you the same sense of fulfillment. My advice? Find a cause or organization you believe in and volunteer. From my research, volunteering is the No. 1 core pursuit.
But my research also showed that it doesn’t so much matter what your core pursuits are — just that you have them, and that you have as many as you can. Tie this “lifestyle” element into your retirement planning, too.
Do you know how you’ll spend your newfound hours of retirement? If the answer is yes and your finances are healthy enough, I say jump off the fence and into some of the best years of your life. You’ve earned them.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
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