The ideal financial scenario in retirement is steady income and conservative returns. Financial loss creates stress. And given stress kills, your goal as a retiree should be to remove as much stress from your life as possible.
The older and wealthier you get, the more you want to move your money into the background of your life. This way, you can focus more of your time doing the things you really love with your remaining time.
Think about how stressful and distracting the 1997 Asian Crisis, the 2000 Dotcom bubble, the 2008-2009 Global Financial Crisis, the March 2020 meltdown, and the 2022 bear market were. Not fun!
I've been thinking about being OK with no longer making a lot of money from investments. With solid returns in the S&P 500 and the real estate market since leaving work in 2012, I kind of feel like Anthony Bourdain when he said,
“I should’ve died in my 20s. I became successful in my 40s. I became a dad in my 50s. I feel like I’ve stolen a car — a really nice car — and I keep looking in the rearview mirror for flashing lights. But there’s been nothing yet.”
Lots Of Lucky Breaks So Far Making Money
Accumulating wealth beyond average is mostly due to luck. As a result, it's important to recognize your luck so you don't confuse skill with good fortune. As soon as you start getting delusional is when you start losing a lot of money!
I got in trouble the summer before starting college and could have easily given up on my future. But in college, I met my wife and landed a hard-to-get job for someone with my lack of pedigree.
Two months before likely being terminated at my first job as the internet bubble burst in 2000, I was able to find a new job in San Francisco for a raise and a promotion.
Instead of selling a home close to the bottom of the market in 2012, I was blessed that nobody took advantage of my uncertainty.
Rather than flaming out with Financial Samurai and having to go back to work a couple of years later, after 13+ years, this site is still standing. It has become a viable source of income to support my family.
Setbacks Are A Part Of Life
Sure, there have been plenty of setbacks as well. Life is one big grind! However, as an optimist, I've chosen to focus on the positives because life is better this way.
With conservative returns and stable income, life becomes magnificent in retirement. All the worry about running out of money or having to go back to work full-time starts to fade away.
But to be OK with this type of financial scenario in retirement, you've also got to fight investing FOMO when times are really good. And investing FOMO is the hardest FOMO to fight off!
The Ideal Financial Scenario In Retirement
Anybody who has been reading Financial Samurai since 2009 should be much wealthier today.
Thus, when I think of de-risking, I don't see it as quite the atrocious move that some make it out to be. My goal is to get back to the early retirement lifestyle under the new administration.
2020 and 2021 were surprisingly strong years in the stock market. Who would have thought the gains would be so huge during a pandemic?
All I did was predict a stock market bottom, but not a ferocious rally that wildly surpassed my expectations. Therefore, it feels like so much of our gains since March 2020 are free money.
Everybody is at a different financial stage in life. For those who are looking for ways to de-risk or profit during before next downturn, I've presented some logical ideas to consider.
With so much wealth built so far, we can create the ideal financial scenario in retirement by locking in some profits. Interests rates have crept up on higher inflation expectations. As a result, retirees can now earn higher risk-free or low-risk income as well.
The Future Of Stocks And Real Estate
In 30 years, stocks and real estate will likely be much higher than it is today. Just by the Fed having a target 2% inflation rate tells you that assets will continue to go up by at least 2% a year on average over the long run.
In 30 years, I'll be in my 70s, wistfully reflecting on all the years gone by. Sure, if I had stayed the course and continued to aggressively invest in risk-assets and never spent a dollar of my gains I'd be much wealthier.
But would I be happier? Probably not because I'm already happy with what I have now. I say it's OK to sell stocks on occasion and enjoy the gains. Otherwise, what's the point of saving and investing in stocks for so long?
Would I be disappointed if I lost 30% – 50% of my investable assets at some point in the second half of my life when I could have conservatively made 3% – 5% a year, forever? Probably.
After a correction, sometimes it takes a decade or more to get back to even. We saw a lost decade for stocks from 2000 – 2012. As a result, I highly recommend folks quantify their risk tolerance by following my FS SEER formula.
Bear markets will come, as it has in 2022. Bear markets are just part of the investing cycle. Thankfully, a good think about a bear market with high interest rates is that it's easier to generate more passive income.
Hard To Change Financial Habits
I'm stuck with a frugal mindset. It makes it difficult to spend more than 50% of our income or ever draw down retirement principal. It's hard to change one's ways over more than two decades of saving and investing for a future that may never come.
As a result, I've proposed revenge spending to ensure that at least some of our investment gains are enjoyed. Round-tripping our investments or dying with way too much would be such a shame.
In addition, I've entered decumulation mode at age 45. I definitely don't want to die with millions in the bank. That would be a waste of time, energy, and stress.
When my wife and I pass, we know we'll be donating or passing down the majority of our wealth to our children and charitable organizations. We subscribe to the Legacy retirement philosophy of leaving a perpetual giving machine.
Therefore, inviting unnecessary money stress due to excess risk-taking at this point in our lives is illogical. It's illogical for anybody who is already happy with enough.
Low-Stress Wealth Creation Feels Great
To calculate a base case net worth growth rate, I'd like everyone to calculate their annual gross income, net income, and absolute savings amount. Then divide these figures by your current net worth.
By doing these calculations, you now have a good idea of your minimal annual net worth growth rate assuming a 0% investment return. You must do the math to create your ideal financial scenario in retirement.
$100,000 gross income
$80,000 net income
$30,000 absolute savings amount
$1,000,000 net worth (investable assets)
The results are 10%, 8%, 3%. In such a scenario, you are able to grow your net worth by 3% a year by saving 37.5% of your after-tax income.
So long as you maintain your income and savings rate, you are growing your net worth by 3% a year risk-free. We've now calculated the baseline.
If you can regularly get your investment returns to surpass your day job income, you can really take things easy in retirement.
A Super Conservative Retirement Investment Scenario
For the sake of illustration, let's say the entire $1 million is dumped into a 20-year treasury bond yielding 4.5%. Now, you are growing your net worth by 4.4% risk-free each year. Not bad buying Treasury bonds after the Fed has aggressively hiked rates.
At a 4.5% growth rate, in 16 years, you will have doubled your net worth with no stress. The only stress will be seeing peers potentially grow wealthier at a faster pace.
However, if you are already happy with a $1 million and making $100,000 gross a year, then perhaps you will continue to be happy no matter how much more your peers make.
Of course, your income might decline or go away over time. But most likely your income will grow as you gain more experience. In addition, you will have built passive income streams that will supplement your active income.
Further, by the time you reach the traditional retirement age, you will at least earn some social security so that there's always some form of income coming in.
Conservative Stock And Bond Allocation Suggestions
I've written about the proper asset allocation of stocks and bonds by age. Below is a suggested stock and bond allocation by “retirement status” to consider. Retirement status could very well be the more meaningful parameter to consider since we all have different situations at different ages.
Examples Of Being OK With Conservative Returns
Here are three examples of retirees with steady incomes and conservative investment returns.
They've all decided to take less investment risk in retirement because their annual expenses are fully covered without needing to work full-time. They have paid off homes and never have to draw down principal to fund their respective retirements either.
Ideal Financial Scenario In Retirement Example #1:
A 63-year-old couple who lives in Des Moines with a paid-off house and an annual budget of $34,000.
Net worth excluding primary residence (investable assets): $500,000
Social Security income: $18,000 (3.6% of net worth)
Dividend income: $10,000 (2% of net worth)
Investment returns: $15,000 (3% appreciation)
Total available gross income + investment returns: $43,000 (8.6% of net worth or 8.6% annual net worth growth).
Although having a $500,000 – $700,000 net worth for a couple is not huge, this couple lives a comfortable life. They don't fear running out of money. Worst case, they can live off their social security and dividend income of $28,000 and tap $6,000 worth of principal during down years.
Ideal Financial Scenario In Retirement Example #2:
A 45-year-old couple with two children who lives in Honolulu. They have a paid-off house and an annual budget of $200,000. Both couples worked and saved for 20 consecutive years post-college and then retired at 43.
Net worth excluding primary residence (investable assets): $5,000,000
Passive income: $150,000 (3% of investable assets)
Part-time consulting: $50,000 (1% of investable assets)
Investment returns: $150,000 (3% appreciation)
Total available gross income + investment returns: $350,000 (7% of net worth or 7% annual net worth growth). Perhaps retiring early with a family on $5 million is pretty good after all.
Part-time consulting from home is enjoyable income that keeps both couples intellectually stimulated. They could ramp up their consulting income to over $100,000 a year without a problem. However, that would mean taking away from family and leisure time.
Ideal Financial Scenario Example #3:
A 65-year-old couple who lives in Manhattan with a paid-off condominium and an annual budget of $300,000. They have the ideal net worth retirement amount of at least $10,000,000 to live fabulously.
Investable assets (net worth excluding condominium): $10,000,000
Passive income: $250,000 (2.5% of investable assets)
Pension income: $120,000 (1.2% of investable assets)
Investment gains: $250,000 (2.5% capital appreciation)
Total available gross income/capital: $620,000 (6.2% of investable assets)
With at least $370,000 a year in passive income plus pension income, this couple has just the right amount after tax to live it up in retirement. Add on another 2.5% a year in capital appreciation ad there's likely never a need to touch principal.
As a result, these grandparents are steadily donating at least $15,000 a year to each of their four grandchildren. Further, they plan to pay for one big family vacation once herd immunity is achieved.
Net Worth Growth Targets By Age
I hope the above three examples show how easy it is to live a comfortable retirement lifestyle with very conservative investment returns. The key is having passive income and earning supplemental retirement income.
If you can't get over investing FOMO, then allocate 10% of your investable assets into the riskiest growth stocks and speculative assets. This way, you'll get your fix and avoid debilitating losses that derail your retirement.
Below is a recommended net worth growth targets by age chart to consider. I use a multiple of income instead of expenses to keep one honest.
With income, you can't lower your income to help you achieve financial freedom sooner. Further, using income helps keep you disciplined as you make more money. For some, it's easier to spend more money the more you make.
Here is a post I wrote highlight several net worth benchmarks to shoot for if you can't decide. The S&P 500 is a good one. So is a multiple of the 10-year bond yield.
Net Worth Growth Progression
When you're just starting out with nobody to care for but yourself, you should be experiencing tremendous net worth growth each year. Swing for the fences. You've got plenty of time to make up for errors or investment losses in your 20s.
Even though your earnings power grows in your 30s and 40s, your net worth growth rate will likely slow as your net worth and expenses grow. This is the sandwich age where you may be providing for children and taking care of your parents.
Hopefully, by the time you reach 50, your net worth will reach 20X your annual average income. As soon as you get to 20X income, you can start downshifting or leaving an undesirable job altogether. If you can get to 20X your annual income at an earlier age, all the better.
By the time you have your “enough money,” there's really no need to shoot for greater than a 5% annual return. If your net worth is indeed 20X your annual income or more, you should be good to go for the remainder of your life with conservative returns and passive income.
If The Direction Is Correct
My favorite Chinese proverb is, “If the direction is correct, sooner or later you will get there.” You are welcome to take more risks to expedite reaching financial freedom. In fact, I encourage you to take all the risks in the world in your 20s. Before you have a family, be more bold.
I've always had a minimum net worth growth target rate of 10%. Thanks to a bull market, according to my free net worth tracking app, my net worth growth rate has been higher since I left full-time work in 2012. You may find the same happen to you if the bull market continues.
However, after not seeing any police lights flashing in my rearview mirror for so long, I'd like to keep it that way by dialing down risk. Better to be conservative and end up with too much versus being aggressive and end up with too little!
Invest In Real Estate For More Retirement Income
Build the ideal financial scenario in retirement with real estate. Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
When you are retired, you want a more steady portfolio. Investing in volatile stocks is less appealing. Further, you don't want to deal as much with maintenance and tenant issues. Hence, why real estate crowdfunding and investing in public REITs is more attractive.
Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore.
Fundrise: A way for all investors to invest in residential and industrial private real estate for just $10 minimum. Fundrise has been around since 2012 and primarily invests in the Sunbelt region where valuations are lower and yields are higher. For most people, investing in a diversified eREIT is the easiest way to go. Fundrise is my favorite real estate platform.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. They also potentially have higher growth due to positive and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Readers, how much is your net worth getting boosted by your savings each year? What's the point of taking so much risk if you already have enough money to be happy? Is it really wise to just stay the course forever and never spend any of your investment money? If so, what's your purpose of investing?
The Ideal Financial Scenario In Retirement: Conservative Returns, is a FS original post. Join 65,000+ others and sign up for my free newsletter here.