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The 5 Most Important Years Of Your Retirement

as a parent when you have your initial kid there'' s no shortage of people to remind you just exactly how important the very first five years are of your child'' s development regrettably there'' s no similar Network there'' s no similar details resource for us as we retire what are one of the most essential 5 years of your retirement so I'' m gon na intend to damage that with today'' s video allow ' s go with a walk and also I ' ll I ' ll share my ideas with you with you having actually been a cost just economic consultant for over 20 years now and also I'' ll I ' ll cut ideal to the chase I think one of the most important years just like with your kid are the very first five years and I wish to share that you understand this is a large transition if you'' re considering retiring'if you ' re obtaining near retiring this is a large change you believe about like you recognize a very long time ago perhaps when you initially left house whether you went to college or you established a trade and you went off by yourself to begin quote unquote adulting the shift from secondary school to university where you placed everything you possess in a couple luggage and also you bid farewell to the individuals that have actually been nurturing you for for your whole life that'' s a large huge'shift I ' m sorry that history noise is a train you actually can'' t see it yet it ' s there alright so that ' s a large transition and the shift to retirement is every little bit as huge right I imply it'' s it ' s the entire globe that you ' ve understood for a long long time and just like with a teen uh or a young person avoiding to university your identity will change also so you understand the it'' s a huge change but it'' s essential that you enter with both feet it'' s crucial that you start on the right track as well as you recognize among the keys is is to recognize what your goals are what your hope you recognize what you'' re mosting likely to mean what you'' re wishing to carry out in retired life not that you need to have an order of business however you recognize these are the points that are very important to me as I retire and you can upgrade them as an example for me um for me I I sort of when my day concerns retire I'' m not retired yet but when my day involves retire things that I have actually considered that are going to be vital to me and are very important to me now are leading relationships um you recognize when you function sadly you'' re unable to spend as much time with the individuals that you enjoy as well as you care around so I'' m really hoping to invest even more time with my adult youngsters I ' m hoping to spend even more time with my wife and also with with pals that imply a lot to me that sadly now I'' m unable to spend a great deal of time with so I intend to invest a 4th of my time on connections I wish to spend a fourth of my time on my health and wellness having your wellness is truly key once you shed your wellness you understand it'' s a retirement ' s gon na look very various for you so doing what I can to eat in a healthy and balanced means to function out on a regular basis to keep my health is mosting likely to be essential then I'' ve always been a long-lasting Learners so I intend to proceed to learn so a fourth of my time on connections a 4th of my time on my health and wellness a fourth of my time simply learning I simply enjoy learning and after that a 4th of my time as an instructor as well as that'' s component of what this YouTube channel is is is repaying and also as well as sharing with folks I'' m fortunate what I ' ve spent my life'my life ' s job is something that uh brings worth to a great deal of individuals it'' s not it seems like usual feeling to me since I ' ve been doing it my whole grown-up life similar to whatever you'' ve been doing most of your grown-up life possibly feels like good sense to you so it'' s important to jump in with both feet it'' s vital not to be thrifty you put on'' t have a monetary plan and also recognize what your goals are and you know lots of normal audiences of my network right we'' re good Savers um we'' re proficient at identifying what our goals are and saving towards those however I wear'' t desire you to be penny-wise and also it'' s natural I ' d state well over half of people you understand whatever their budget plan is whatever their strategy states that they can invest they finish up you understand still conserving 25 or 30 percent of that and wear'' t do that right it ' s it your entire life has been a balance between present you and also future you and now this is your future your uh the future you so be sure to invest that money and also enjoy it these are your healthiest most energetic years uh I likewise assume it'' s uh'it ' s it ' s excellent to have a financial plan if you don ' t'have a plan young boy it ' s actually difficult to recognize just how much money you can spend as well as you recognize a great deal of individuals are giving up unnecessarily you wear'' t wish to do that you put on ' t have to do that so have a financial plan and have a strategy an installment plan um that I already spoke around ideal believe about how am I going to invest my time 24-hour a day is a lot of time right a significant component of our life has been spent at the office fine various other reasons that the first five years are very crucial there'' s some large choices that require to be made in the initial 5 years allow ' s say you'' re 60 as well as um and you ' re retiring early a lot of visitors of my network are intending to do that or you'' re 62 or 63 you know there'' s some big choices that require to be made in between you know let'' s the initial let ' s claim 60 to 67 60 to 68 also over that yet you recognize Medicare Medicare is not as easy as just raising your hand claiming hi there federal government you recognize I'' m 65 years of ages now I'' d like my paramedic I ' d like my medicare right you need to choose do you desire your uh traditional Medicare or do you want what'' s called Medicare Advantage which is a terrific advertising name uh standard Medicare is offered by the federal government Medicare advantages is offered by an exclusive company and you can transform your mind on that particular yet if you select typical Medicare uh it has a twenty dollar insurance deductible for Medicare Part B and you can you can purchase Medicare gap insurance policy and typically beyond a couple of exemptions you need to go with clinical underwriting to be authorized so if you have a pre-existing problem an insurance firm can refute you the meta the Medigap insurance but when you first get Medicare I am not a Medicare expert but you have a 6 about a six month window where you put on'' t have to go with the medical underwriting you obtain an exemption for that so that'' s a big decision'additionally when you ' re mosting likely to begin taking Medication uh when you'' re going to start taking social safety is a big decision so the initial 5 years are crucial one more factor is because you'' ve got these huge decisions that you need to make as well as after that unfortunately this is just a truth that all of us face in the very first 5 years we Face what'' s called series of return danger it ends up that having adverse returns having poor stock market returns in the early years of our retired life are have some of the greatest impact as to whether our economic plan achieves success or not and also none people recognize what the first 5 years are going to be like but that'' s one of the reasons that the initial 5 years is so vital another point that'' s vital if you'' re curious about this subject is to enjoy this video up here that speak about five reasons to uh it discusses I'' m sorry average income for retirees as well as this video clip down right here that speak about five reasons to retire as quickly as you can thanks for viewing bye bye

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The 4% Rule for Retirement (FIRE)

If you have spent any time researching retirement planning online, you have heard of the 4% rule. If you haven’t heard of it, the 4% rule suggests that if you spend 4% of your assets in your initial year of retirement, and then adjust for inflation each year going forward, you will be unlikely to run out of money. To put some numbers to it, if you wanted to retire and spend $40,000 per year, adjusted for inflation, from your portfolio, you would need to retire with one million dollars to adhere to the four percent rule. This rule is alternatively described as the requirement to have 25 years worth of spending in your portfolio to afford retirement. 1/25 equals 4% – it’s the same rule. While it is simple and elegant, the 4% rule is probably not the best way to plan for retirement, especially if you plan on retiring early. I’m Ben Felix, Associate Portfolio Manager at PWL Capital. In this episode of Common Sense Investing, I’m going to tell you why the 4% rule is not a rule to live by.

The 4% rule originated in William Bengen’s October 1994 study, published in the Journal of Financial Planning. Bengen was a financial planner. He wanted to find a realistic safe withdrawal rate to recommend to his retired clients. Bengan’s breakthrough in determining a safe withdrawal rate came from modelling spending over 30-year periods in US market history rather than the common practice of simply using average historical returns. Using data for a hypothetical portfolio consisting of 50% S&P 500 index and 50% intermediate-term US government bonds he looked at rolling 30-year periods starting in 1926, ending with 1992. So, 1926 – 1955, followed by 1927 – 1956 etc., ending with 1963 – 1992. The maximum safe withdrawal rate in the worst 30-year period ended up being just over 4%. From this simple but innovative analysis, the 4% rule was born. More recently Bengen has adjusted his spending rule to 4.5% based on the inclusion of small cap stocks in the hypothetical historical portfolio.

While the 4% (and the 4.5% rule) may have basis in historical US data, there are substantial problems with these rules in general, and specifically in the case of a retirement period longer than 30 years. In his 2017 book How Much Can I Spend in Retirement, Wade Pfau, Ph.D, CFA, looked at 30-year safe withdrawal rates in both US and non-US markets using the Dimson-Marsh-Staunton Global Returns Dataset, and assuming a portfolio of 50% stocks and 50% bills. He found that the US at 3.9%, Canada at 4.0%, New Zealand at 3.8%, and Denmark at 3.7% were the only countries in the dataset that would have historically supported something close to the 4% rule. The aggregate global portfolio of stocks and bills had a much lower 30-year safe withdrawal rate of 3.5%. Considering returns other that US historical returns is important, but, in my opinion, one of the most important assumptions to be aware of in the 4% rule is the 30-year retirement period used by Bengen. People are living longer, and many of the bloggers citing the 4% rule are focused on FIRE, financial independence retire early.

In Bengen’s study the 4% rule with a 50% stock 50% bond portfolio was shown to have a 0% chance of failure over 30-year historical periods in the US. That chance of failure increases to around 15% over 40-year periods, and closer to 30% over 50-year periods. FIRE likely means a retirement period longer than 30 years. Modelling longer time periods using historical sampling becomes problematic because we have data for a limited number of historical 50-year periods.

One way to address this issue is with Monte Carlo simulation. Monte Carlo is a technique where an unlimited number of sample data sets can be simulated to model uncertainty without relying on historical periods. Even with Monte Carlo simulation, there is an obvious risk to using historical data to build expectations about the future. The world today is different than it was in the past. Interest rates are low, and stock prices are high. While it may be reasonable to expect relative outcomes to persist, such as stocks outperforming bonds, small stocks outperforming large stocks, and value stocks outperforming growth stocks, the magnitude of future returns are unknown and unknowable. To address this for financial planning, PWL Capital uses a combination of equilibrium cost of capital and current market conditions to build an estimate for expected future returns for use in financial planning. This process is outlined in the 2016 paper Great Expectations.

Using the December 2017 PWL Capital expected returns for a 50% stock 50% bond portfolio we are able to model the safe withdrawal rate for varying durations of retirement using Monte Carlo simulation. We will assume that a 95% success rate over 1,000 trials is sufficient to be called a safe withdrawal rate. For a 30-year retirement period, our Monte Carlo simulation gives us a 3.5% safe withdrawal rate. Pretty close to the original 4% rule, and spot on with Wade Pfau’s global revision of Bengen’s analysis. Now let’s say a 40-year old wants to retire today and assume life until age 95. That’s a 55-year retirement period. The safe withdrawal rate? 2.2%. I think that this is such an important message. The 4% rule falls apart over longer retirement periods. So far we have talked about spending a consistent inflation adjusted amount each year in retirement. One way to increase the amount that you can spend overall is allowing for variable spending. In general this means spending more when markets are good, and spending less when markets are bad. The result is more spending overall with a lower probability of running out of money. The catch is that you have to live with a variable income or have the ability to generate additional income from, say, working, to fill in the gaps when markets are not doing well.

We also need to talk about fees. Fees reduce returns. Fees may be negligible if you are using low-cost ETFs, but they become extremely important if you are using high-fee mutual funds, or if you are paying for financial advice. The safe withdrawal rate in the worst 30-year period in the US drops to 3.56% with a 1% fee, making the 4% rule the more like the 3.5% rule after a 1% fee.

Adding a 1% fee to the Monte Carlo simulation reduces the safe withdrawal rates by around 0.50% on average. In both cases this is a meaningful reduction in spending. Of course, fees need to be considered alongside the value being received in exchange for the fee. This value should be heavily tied to behavioural coaching and financial decision making. There have been two well-known attempts to quantify the value of financial advice, one by Vanguard and one by Morningstar. Vanguard estimated that between building a customized investment plan, minimizing risks and tax impacts, and behavioural coaching, good financial advice can add an average of 3% per year to returns. Morningstar looked at withdrawal strategies, asset allocation, tax efficiency, liability relative optimization, annuity allocation, and timing of social security (CPP in Canada), to arrive at a value-add of 2.34% per year.

PWL Capital’s Raymond Kerzerho has also written on this topic, finding an estimated value-add of just over 3% per year. Based on these analyses, one could argue that paying 1% for good financial advice could even increase your safe withdrawal rate. I would not go that far, but the point is that while fees are a consideration, they may be worthwhile in exchange for good advice.

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