What Will $2 Million Get Your Clients In Retirement?

 

Like any retirement calculations, this one involves many assumptions. But as long as our assumptions are reasonable, say 6% for equity returns rather than the 10% figure that many people used to use, we can come up with a very reasonable estimate for how much money one needs to retire comfortably.

 

Let’s start with the assumptions I used for the couple we will look at:

Inflation (CPI)

3.00%

Current Age of Both People

65

Age Of Retirement

65

Age When Both People Have Passed Away

95

Social Security at age 67 (combined)

$35,000 per year

Average Savings Rate

None (Already Retired)

Total Investment Balance Today

$2,000,000 (50% in Taxable, 50% in IRAs)

Recurring Annual Expenses in Retirement

$70,000

Investment Mix Before Retirement

70% U.S. Value Stocks,
30% Medium Term Treasuries

Return Assumption Value Stocks

6% per year

Standard Deviation Value Stocks

16.20%

Return Assumption Treasuries

1.5% per year

Standard Deviation Treasuries

7.20%

 

Before generating a retirement plan for this couple the first thing we need to clear up is, what constitutes success? We live in a dynamic world, especially when it comes to investing. So I like to look at the probability of never running out of money in retirement using Monte Carlo analysis, where thousands of scenarios are run, shocking investment returns in every scenario in every year. In this example I will define success as having a probability of at least 85% that funds never run out in retirement.

 

Using Monte Carlo analysis in our retirement planner I calculated that the probability they never run out of money is 97%. This easily meets our definition of success. In fact, this couple can spend more than $70,000 and still succeed, given that our definition of success is that the probability that funds are never depleted is 85% or more.

 

So how much can this couple spend per year and still have an 85% chance of achieving all of their retirement goals? I ran some scenarios and found the answer to be $81,000. This is the amount they can spend each year and still have an 85% chance of never running out of money.

 

Yet another question we can ask is, how can they spend $81,000 in retirement and raise the probability of never running out of money? There are really only two ways to do this since this couple is already retired (assuming they don’t want to go back to work): They can find higher returning investments with the same level of volatility they currently have or they can find investments that have the same returns, but less volatility.

 

My favorite way to reduce volatility while maintaining reasonable levels of return is to buy high quality dividend paying stocks that have a history of rising dividends over time. A few of my favorite dividend payers for retirement portfolios that have consistently raised their dividends over the years are Johnson & Johnson (JNJ), Sysco (SYY), AT&T (T), Wal-Mart (WMT), Coca-Cola (KO), and Eli Lilly (LLY).

Company

Div Yield

   

1 Yr Div Growth Rate

5 Yr Div Growth Annual Rate

JNJ

2.8%

6.7%

8.2%

SYY

2.8%

3.9%

7.7%

T

5.5%

2.3%

3.8%

WMT

2.4%

8.9%

12.6%

KO

2.8%

9.8%

8.4%

LLY

3.8%

0%

2.3%

 

I replaced their Equity Value fund with the stocks listed above, equally weighted. I kept the same total return assumption, but lowered the level of volatility to the historical levels of these stocks. That is, I reduced the volatility level from about 16% to 13% per year.

 

The probability that this couple never runs out of money now jumps from 85% to 93%. This is a large jump, solely due to the fact that they are now invested in more stable, solid dividend paying stocks instead of an equity index fund.

 

Each person and couple has a different situation and might need to change a variety of things in order to meet their retirement goals. But it is usually impossible to tell whether or not a person can retire when you want until they sit down and actually run through the numbers. At that point they can begin running interesting scenarios that will tell tehm what they need to do to get to their goals.

 

This Website Is For Financial Professionals Only


A Strategically Focused CE Curriculum

With classes approved for over a decade by the CFP Board, IWI, and NASBA, Advisors4Advisors CE classes are an optimal knowledge stream for CFP®, CIMA®, CPA, CPA/PFS®, CFA®, and other practitioners. It's not a grab bag of speakers willing to sponsor CE content. Nor is it a one-man CE course. It's a group of subject matter experts with amazing communication skills and a history of thought leadership that, together, give advisors a well-rounded knowledge system for running a professional practice ethically and intelligently.

CE Since October 2008

A4A CE classes for financial professionals began in October 2008, the week Lehman Bros. collapsed. Initially billed as “The Financial Crisis Webinar Series,” A4A connects advisors with authoritative sources on investing, tax, and financial planning, chosen by A4A Editor Andrew Gluck, a veteran financial reporter. A4A members get a stream of CE classes for an advisor who: 

  • holds a CFP®, CIMA®, CPA, CPA/PFS, CFA or other designation requiring CE annually 
  • values monthly CE classes by Fritz Meyer, Craig Israelsen, Bob Keebler, Frank Murtha, or Andrew Gluck
  • diversifies a core of client portfolios in low-expense funds
  • invests based on MPT and economic fundamentals
  • advises on tax and financial planning as well as investing
  • needs financial counseling skills
  • wants the Certified Financial Counselor™ designation 
  • is building a brand as a thought leader locally or in a niche
  • wants the facts when bad news breaks
  • wants CE aligned with a content marketing system
  • wants 24/7 access to CE on-demand
  • insists on objective evidenced-based tax and investment planning analysis
MEMBER REVIEWS 
William Desormeau, Jr.  
It is not possible for me to overstate the cumulative value that Craig, Bob and Fritz have added for over 10 years to my investment advisory practice, as well as for personal and family financial planning. A4A gets my highest recommendation
Lynn Najman, CFP®
I’ve subscribed to A4A since its inception, and always find it intellectually stimulating and on point. It’s one of the few CE solutions out there that doesn’t waste my time by pushing product or talking down to me.

PeteDeacon-CPA-CFP

Pete Deacon, CPA, CFP®
A4A has had a profound effect on my business. Since 2009, I’ve relied on the consistent messaging and updates to run my business successfully. Being able to present the information from Bob, Fritz, and Craig's ongoing CE webinars has been a significant benefit.

fredericMayersen-phd-cfp

Fredric Mayerson, MBA, PhD, CFP®
I've been a financial professional and professor of finance for 35 years and find Fritz Meyer and Robert Keebler to be among the most engaging, incredibly knowledgeable, and experienced presenters I’ve encountered. They deliver an extraordinary amount of information in an extremely interesting way — sequentially and developmentally, utilizing pedagogical tools and techniques that few possess.  A4A to is the most consistently excellent CE program available.  
Ron Roge, MS, CFP®
I’ve been attending A4A many years because the CE classes are outstanding, and my time is valuable. Though I have over 35 years of experience, I’m always learning something new on A4A. I attend fewer conferences now because the CE is generally not advanced. If you want to learn from the best, in a faster, easier, and less expensive way, I highly recommend A4A.

John R. Day, CPA/PFS®

I’ve been a member since 2011 and never miss the monthly webinars with Fritz Meyer. I appreciate Fritz’s independent views on the economy and markets and Bob Keebler keeps me updated on excellent tax planning ideas. A4A is a great value!

NormanPolitzinerCFP

Norman Politziner, CFP

I wouldn't miss a Fritz Meyer webinar unless my pants were on fire. I've relied on Andrew Gluck's knowledge systems --client communications and CE -- for two decades. It's simply the best solution for tax, financial, investment, and risk-management professionals.®   

Dan Hawley, CFP® 

A4A, for over a decade, has been a great resource for useful and accurate information and CE. A4A and Advisor Products are bargains for an advisory practice. 

KevinBrosious-CFP-CPA-PFS

Kevin Brosious, MBA, CFP®, CPA/PFS®

I get CPA CE credit and CFP credit for the webinars.  But not only that, the A4A content is terrific