HOW MUCH WILL YOU NEED TO RETIRE

This question is the primary concern of most 401K investors. This question creates anxiety in most 401K investors. What is your answer to this question? Does this question stress you out?

You are probably unsure about the answer.

We are not going to be able to provide you with the full answer today, but we want to start you down the path to answering this question and to becoming confident that you will have enough money to retire comfortably.

Here are some reasons why the answer to this big retirement question is such a problem for most people:

• Uncertainty about whether they are saving enough.

• Uncertainty about whether they are investing their retirement savings properly.

• Confusing and conflicting information in the financial services world.

• Lack of the proper planning tools.

• Uncertainty about how much money they will need in retirement.

• Bad investing advice.

• Fear of losing their savings in the stock market.

We discuss most of these things regularly in our newsletters and webinars and we will continue to do so in the future. Our entire mission is to help people retire comfortably and to grow their confidence in all these areas.

Today, will focus on the planning tools. We provide more in-depth training on these topics in our Market Signals program, but we want to cover just a few key points today.

Spreadsheets are terrific for creating the forecasts and projections that you will need for retirement planning. There are two spreadsheets that you need for retirement planning:

1. Projections for your working years up until age 65 or when you plan to retire.

2. Projections for your retirement years.

This week, we will focus on the first set of projections – your working years. Next week, we will cover the second one – your retirement years. Constructing these projections is not that difficult if you have some basic spreadsheet skills. We produce these plans for free for our Market Signals subscribers.

The information to create the working years projections is as follows:

• Current age and expected retirement age.

• Current retirement account balance.

• Annual retirement account contributions – yours and your employers.

• Expected investment returns based on your investing strategy.

• Expected annual withdrawals in retirement.

Plugging in all those data elements and creating the formulas will produce a simple spreadsheet with a projected retirement account balance at retirement age.

The first three data elements (age, balance, and contributions) are straightforward. It is the last two (projected investment returns and expected retirement withdrawals) where people struggle the most. This week, we will focus on the critical element of projected investment returns. Next week, we will address the topic of expected retirement withdrawals.

Your expected investment returns can range anywhere from 3% per year up to around 12% per year depending upon your investment strategy.

Most financial advisors do not tie your projected investment returns to your investment strategy. They try to be conservative and tend to use an average return of around 5% to 6%. They do this because of the uncertainty around future results but also to make sure people don’t run out of money when they retire – a good thing.

We believe that it is much better to take the time to develop the most accurate projections for something so important. What is the point if you are not going to use the most accurate information?

Here are the most common types of retirement investors and retirement investment strategies and their expected annual investment returns.

STRATEGY ASSETS EXPECTED RETURNS*

Highly Risk Averse Cash & Bonds only 3% to 4%

Do It Yourself (low risk) A Little bit of everything 5% to 6%

But lots of bonds & cash

Industry Recommended Target date funds 7.5%

Mix of stocks & bonds

Do It Yourself (High risk) Mostly mutual funds 8%

Best Practice 100% S&P Index Fund 9%

Market Signals Index Funds Bull Markets 12.7%

Cash in Bear Markets

*These are average annual returns. Actual returns by year will fluctuate quite a bit but over long periods of time you can expect these average rates of return.

Most 401K investors fall into the first two strategies above – highly risk averse and do-it-yourself low risk. This is why the average annual investment returns for 401K account holders is between 4% and 5% per year.

People would be much better off just putting all of their money in a target date fund or in an S&P 500 index fund. It is simpler and produces better returns. The only drawback is the financial and emotional suffering during stock market collapses. And it is the excessive volatility of the stock market that causes lots of people to choose the conservative investment strategies. But if you hold onto diversified large cap index funds for the long run, you will see much higher returns.

Our Market Signals system invests primarily in large cap index funds like the S&P 500, but it also includes a strategy and system to deal with stock market collapses. It provides similar returns during bull markets, but it performs better in the long run because it avoids big losses during stock market collapses.

Which investment strategy from the list above do you follow? Whatever it is, use the associated annual investment returns in your retirement planning spreadsheets.

Along with when you start to save for retirement and how much you save for retirement, your investment strategy and its associated annual investment return is the biggest factor in determining your security and your comfort in retirement. If you are totally risk averse, you don’t have to fear stock market collapses, but you need to be prepared for very low investment returns (3% to 4% per year). To achieve your financial goals in retirement you will need to save and contribute much more each year to your retirement fund.

Your investment returns for all the other strategies will be much higher. But unless you use the Market Signals system, you will also have to be prepared to suffer terribly during stock market collapses.

The most successful investors invest in the best assets (large cap index funds) and they have a proven strategy/system to deal with major stock market declines (Market Signals).

Next week, we will focus on the retirement years and how much money you will need after you retire.

If you are not already a subscriber to our Market Signals newsletter, click here to learn more.

Happy Investing,

Phil

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Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.