Good morning & happy Monday!
You have two choices: you can make a living, or you can design a life.
Jim Rohn, American entrepreneur, author & motivational speaker
This financial world can be quite complicated. I’ve been studying it my entire career of 23+ years and I’m still learning new things all the time. That’s one of the reasons I love this field … there is more to learn than a lifetime can provide … and I love that challenge 😊
However, some elements of the financial world are quite simple. Today I would like to discuss a very simple thought.
When we cut out all the noise there are only one of two options that will happen in our financial lives and in the financial life of every person. Either:
- Your money will outlive you or
- You will outlive your money
In the first scenario where the money outlives the person the individual is able to live a financially independent life and then leave money behind to cherished loved ones.
In the second scenario the person outlives the money, in other words they run out of money. This scenario is obviously far from ideal and pretty much every client I have has expressed fear over being in this scenario.
No one I’ve ever met desires to be in the 2nd scenario, but sometimes behavior causes that to be the case. In my professional observations there are 2 main reasons people would outlive their money: spending behavior and investing behavior. I have no studies to point to, and this is not a data driven statement, this is just simply what I’ve observed over nearly a quarter of a century in this industry.
The spending behavior is relatively easy to diagnose, but it can be very difficult in change. We all know we can’t spend more than we make, but everywhere you turn we are told of a NEED for this item or that thing. Living within our means is true during your working years as well as for the budget established in retirement years. If we spend more than we make we will eventually run out of money.
The investing behavior is quite a bit trickier. One may be able to live within ones means reasonably well, and may even be a good saver, but there is still an element of investment behavior that can be significantly dangerous. Let’s look at 2 hypothetical examples to illustrate this thought.
For these examples let’s assume that I have saved $1,000,000 for retirement and that I need $50,000/year in income from that account and that I need that income to increase by 3% per year for inflation.
Let’s also assume I invest directly in the S&P 500 (which can’t be done, but it’s the best example we can use) and that I retired 15 years ago (January 1, 2007)
S&P 500 total return (including dividends) Income needed 3% increase
(www.slickcharts.com/sp500/returns)
2007 5.49% $50,000
2008 -37.00% $51,500
2009 26.46% $53,045
2010 15.06% $54,636
2011 2.11% $56,275
2012 16.00% $57,963
2013 32.39% $59,702
2014 13.69% $61,493
2015 1.38% $63,338
2016 11.96% $65,238
2017 21.83% $67,195
2018 -4.38% $69,211
2019 31.49% $71,288
2020 18.40% $73,426
2021 28.71% $75,629
Example 1: At the end of my first year of retirement in 2007 I pull out $50,000 for my annual income and my account value would be $1,004,900. All good, everything going as planned.
Then year 2 comes around and the S&P 500 drops 37%. At the end of that year I pull out my income needed of $51,500 and my account value is $581,587. I freak out and put my money in cash and make no interest until “things settle down.”
Well, I never feel comfortable getting back into investments and leave the money in cash earning no interest, but I still need my income so I pull out $53,045 and my account, the year following I need a $54,636 distribution.
You see where I’m going here? This money is not going to last long at that distribution rate. In fact, in this example the account will be completely depleted in 2018 … less than 12 years into my retirement. Yikes!
S&P 500 total return Income needed Value at end of the year
(including dividends) (increasing 3%/year) (annual wd taken end year )
(www.slickcharts.com/sp500/returns)
2007 5.49% $50,000 $1,004,900
2008 -37.00% $51,500 $581,587
2009 0% $53,045 $528,542
2010 0% $54,636 $473,906
2011 0% $56,275 $417,631
2012 0% $57,963 $359,668
2013 0% $59,702 $299,966
2014 0% $61,493 $238,473
2015 0% $63,338 $175,135
2016 0% $65,238 $109,897
2017 0% $67,195 $42,702
2018 0% $42,702 $0
$683,087
So, in this example my $1,000,000 only generated $683,087 in total income before the funds were exhausted. Disgusting & depressing.
Let’s move on to example # 2 … a night & day difference.
Example #2: Everything identical as above, except I don’t panic and bail from my investment strategy at the end of 2008. What happens in that scenario?
S&P 500 total return Income needed Value at end of the year
(including dividends) (increasing 3%/year) (annual wd taken end year )
(www.slickcharts.com/sp500/returns)
2007 5.49% $50,000 $1,004,900
2008 -37.00% $51,500 $581,587
2009 26.46% $53,045 $682,429
2010 15.06% $54,636 $730,567
2011 2.11% $56,275 $689,707
2012 16.00% $57,963 $742,098
2013 32.39% $59,702 $924,987
2014 13.69% $61,493 $990,125
2015 1.38% $63,338 $940,451
2016 11.96% $65,238 $987,691
2017 21.83% $67,195 $1,136,109
2018 -4.38% $69,211 $1,017,137
2019 31.49% $71,288 $1,266,145
2020 18.40% $73,426 $1,425,690
2021 28.71% $75,629 $1,759,376
$929,939
In this second scenario I stay put with my investment strategy, I drew income totaling $929,939 over 15 years and have a balance of $1,759,376. As you can see in the chart above, it was not always easy … heck, it took me till 2017 to be back to $1,000,000, but my patience paid off and I am far more likely to outlive my money that the first example where my money outlived me.
Absolutely amazing how that one critical time in the investor’s life caused such a dramatically different outcome.
My friends, investing requires patience, but history teaches us that patience pays off. Patience could be the difference between outliving your money or having your money outlive you.
Next week I’ll expand on this thought process a bit more and I have much more to share on this topic, but for today I will bid you a happy Monday and wish you an amazing week ahead 😊