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Running Out of Money


Running Out of Money

Running Out of Money

Hello, I’m John Strohman, founder of JCS Financial Solutions. Today, I want to discuss a critical aspect of retirement planning: the risk of depleting your financial resources. Whether retirement seems like a distant dream or it's looming on the horizon, it's crucial to understand and plan for this risk.

Let’s begin by considering a scenario: Imagine you have a retirement nest egg of one million dollars. You aspire to leave a substantial legacy, maybe $500,000 for your children or a favorite charity. You also want an annual retirement income of $40,000, assuming an inflation rate of 3% over a long retirement of 30 years. With these factors in mind, let's assume your investments in a balanced portfolio yield an 8% return.

Running thousands of simulations based on these parameters, we find a relatively low initial failure rate of about 6%. However, it’s essential not to get too comfortable with this figure. Upon reevaluating our assumptions and incorporating a 25% tax rate and investment fees of 1.5%, the failure rate dramatically increases to 83%. This suggests a near certainty of running out of money under these conditions.

To explore further, let’s adjust some variables. Suppose inflation rises to 4%; the risk of depleting your funds escalates to a 95% chance. Even shifting to a more aggressive investment strategy, aiming for a 10% return, only reduces the failure rate to 75%. 

Let’s consider another strategy: reducing your retirement income. If we decrease the annual withdrawal to $30,000, the failure rate improves but remains high at around 60%. Cutting it further to $20,000 brings us back to a more manageable 7% failure rate.

Here's an analogy to put these numbers into perspective. Imagine boarding an airplane where the pilot announces a 1 in 10 chance of crashing. You would likely reconsider flying. Similarly, a 7% risk of financial ruin might be low, but the consequences are severe.

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Now, if adjusting your retirement income drastically, from $40,000 to $20,000, significantly changes your failure rate, it's worth considering the implications on your lifestyle. Reducing your planned legacy by half allows you to maintain a $40,000 annual income, but this doesn't substantially improve your odds.

It’s evident that even slight adjustments in assumptions can significantly affect your financial stability in retirement. That’s why it's important not to overlook any factors that might impact your financial future.

I invite you to visit our website at www.jcsfinancialsolutions.com, and schedule an appointment where we can perform a personalized assessment based on your financial situation and retirement goals. Together, we can explore strategies and adjustments to ensure that you have a reliable financial plan that addresses your needs and minimizes the risk of running out of money in retirement.

Thank you for your time, and I look forward to helping you secure a financially stable future.