Here's a question I ask at the beginning of my seminars:
Is Financial Success More About:
- Investment Expertise?
- How much money you make?
- Habits and Behavior?
I bet you know the answer. Your concept of money, developed throughout your lifetime, leads to your habits, behaviors, and decisions about your finances. Creating the right path to financial success involves understanding your concept of money and helping you set a plan that leads to meeting your dreams and goals. It's an emotional topic, and sometimes you need an unbiased resource to help you navigate the journey.
Perhaps over simplistic, but two charts can sum up Retirement planning:
Accumulation and Distribution
Chart 1: ACCUMULATION (saving & investing)
The miracle of compounding is where the reinvestment of earnings (dividends or interest) gets exponentially bigger, over time.
Example: Invest $10,000, earning 10% per year and reinvest (compound) the earnings. That initial $10,000 will be worth $174,494 30 years later! Now, do that every year...it's exponential!
Chart 2: DISTRIBUTION (withdrawal rate %)
The amount that you spend in retirement has a big impact on your chances of having enough money throughout retirement. The more you spend, the higher the probability of running out of money. The lower you spend, the more likely you'll have plenty, and may leave your heirs money too.
The amount of money you spend can be expressed as a percent of net worth (spending / net worth). We call that the "withdrawal rate".
Example: If you have $1M at retirement, a 4% withdrawal rate would be $40,000/year.
Generally, a withdrawal rate of 4% is considered “safe” so that you do not run out of money in retirement. Spend 2%, and you should be increasing your net worth. Spending 6% creates more risk that you will outlive your money.
Of course, these 2 charts are very simplistic representations of basic concepts. There are many factors that can influence the outcome and your probability of success. Some factors you can somewhat control (spending, saving, investment allocation...) and some you cannot (investment returns, tax rates, inflation...). This is why comprehensive financial planning is so critical - these simple principles are good for understanding the big picture, but do not account for all the moving parts to optimize your unique situation.