Your Retirement Depends on Math, Not The Market

Your retirement income should not depend on the market but on mathematics. The arithmetic isn’t as complicated as you would imagine. It all begins with separating your assets into three distinct containers.

Retirement investors may be worried about possible significant losses they will never be able to recoup due to market ups and downs.

And such anxieties aren’t necessarily unwarranted. From 1928 to March 2024, there have been 26 “bear markets.” A bear market lasts for at least two months and falls by 20% or more. The average bear market decrease since 1928 has been 35.62%, so the potential for significant losses is real.

Although market downturns are unavoidable, there are ways to protect yourself. Ultimately, your retirement should not consist of a never-ending string of restless nights. You can avoid this problem by carefully planning your income to meet your lifestyle demands, provide for emergencies, and include an appropriate amount for investment and development.

This retirement strategy may be summed up as follows: your income should not depend on the market and should rely on mathematics.

Here is how the math plays out.

Suppose a couple is nearing retirement, their savings strategy has been successful, and they have $1 million put away. With retirement lasting 20 years, 30 years, or more, it is essential to prepare properly so that the money lasts for the remainder of their life. With people living longer these days, it is vital to make sound financial decisions. Here is when arithmetic comes into play, as we divide the money into buckets.

Security bucket

Life is full of unforeseen catastrophes, both in and out of retirement, so it’s a good idea to have money set aside specifically for emergencies to make retirement more enjoyable. The amount of money in this bucket is always determined by the individual and should take into consideration things like the car requiring new tires, the roof leaks, or another minor or huge emergency arising. As you can expect, the sums vary, but let’s assume the couple in our example settles on $50,000 for their emergency fund. This offers a solid foundation for determining how to manage the remainder of their funds.

Earnings bucket

When contemplating the contents of this bucket, retirees must determine how much monthly income they will need to fund their lifestyle. They need money for groceries, power, water, and other essentials, including leisure time.

Suppose our couple has a monthly income objective of $6,000 and expects to receive $2,000 from Social Security each, for a total of $4,000. That implies a $2,000 income gap between what Social Security delivers and their desired income.

At least a portion of their retirement funds might be used to purchase an annuity, which functions something like a personal pension plan and has the potential to provide a guaranteed monthly income that you cannot outlive. There are various sorts of annuities; you don’t lose money with annuities, which means you have the possibility for a more stable income stream regardless of market performance.

Now that they have taken care of their monthly bills, our couple can go on to the next part of their math problem: determining what they have left for long-term investments.

Growth Bucket

Certainly, retirees must be prudent with their finances, but this is the bucket in which you may be relatively risky with your investments, as your income demands have been met. You have a safety net in case of an emergency. The growth bucket enables you to stay up with inflation and exceed it.

In addition, the value of this bucket might go down as the market lowers, so this shouldn’t be money that you plan to dip into any time soon. When the market plummets, the last thing you want is to have to tap into your savings for retirement. The account balance would start to shrink fast as market forces, along with your withdrawals, drained it. That’s a situation that might send retirees back into the workforce.

There is a common misconception that retirees need to be conservative with their money. Finding ways to grow your money is OK as long as your lifestyle is taken care of and your emergency fund is protected. This isn’t to imply you should be too aggressive. There’s no need for Las Vegas-style gaming. There’s nothing wrong with designing a portfolio with more equities and fewer bonds than the 60/40 split, so many experts recommend. Unfortunately, it’s typical in the financial world to see people offering advice that deals in generalities like the 60/40 split. Still, as you hit retirement, you shouldn’t rely on cookie-cutter techniques. You should consult a financial advisor that can customize a plan that meets your requirements.

One of the nice things about this three-bucket method is the opportunity of taking benefit of market growth without having your whole retirement riches linked to it.

Certainly, your numbers and demands will differ from these examples. There may be a need for a larger or smaller emergency fund, depending on your comfort level. You may anticipate traveling in retirement and wish to have sufficient funds in the income bucket to pay these expenses.

As you approach retirement, you must consult a financial expert who can assist you in solving your particular math problem. Thus, market fluctuations will impact you less, allowing you to focus on the pleasures of retirement.

* The supplied hypothetical example is for illustrative reasons only; it does not represent a real-life circumstance and should not be taken as personalized advice.

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