Imagine saving up a million dollars for retirement, only to end up with a mere $40,000 a year to live off of. That seems to be the unfortunate reality for many retirees aged between 65 and 74. In fact, the average retiree in this age group has a nest egg of $609,230 – and that’s the mean average, not even the median. The traditional retirement model based on the 4% rule just doesn’t seem to cut it. The math simply sucks.
But fear not, there is a better way. The key lies in understanding the root of the problem, particularly in the volatility of paper assets like stocks.
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The Problem with Paper Assets: Volatility
- Stocks have historically delivered an average of around 10% annual returns, which sounds impressive. However, this average conceals the fact that stocks can be highly volatile, with some years or even decades resulting in huge losses.
- The 4% rule was initially developed by Bill Bengen in the 1990s as a safe withdrawal rate based on worst-case scenarios from historical stock and bond returns. Retirees who stick to this rule minimize the risk of outliving their savings over a 30-year retirement period.
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Oversaving for Retirement
- Despite earning an average of 10% annually on stocks, retirees tend to withdraw only 4% to ensure they never run out of money. This cautious approach often results in retirees passing away with a significant surplus of unspent money.
- As individuals, we don’t want to spend our lives saving up for a retirement that provides us with inadequate income.
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Real Estate as a Solution
- Real estate investments offer an alternative with potentially higher returns. Unlike stocks, real estate investments can provide steady income in the form of rents and offer the potential for appreciation upon sale.
- Investments in real estate can offer asymmetrical returns, meaning high returns with low risk. Experienced real estate investors understand how to navigate the intricacies of the market to leverage such opportunities effectively.
- Avoiding Sequence of Returns Risk
- One of the risks associated with stocks is the sequence of returns risk. A market crash early in retirement can significantly impact the longevity of a retiree’s portfolio if stocks are sold off at a low price.
- By diversifying investments and having other income sources to rely on in the event of a market crash, retirees can mitigate the impact of sequence of returns risk.
In conclusion, by shifting the focus from traditional paper assets to real estate investments, individuals can potentially generate higher and more predictable income streams for retirement. Rather than sticking to outdated withdrawal rules, consider exploring opportunities in real estate to secure a more financially stable retirement.
