Do You Really Need 8 Million to Retire?
Most financial bloggers are looked upon as reliable sources of information. So there should be some responsibility to offer up sound advice. Some take that seriously while some will write anything to get more readers and notoriety through sensationalism. There is a difference between using sensationalism to attract readers and then really offering some quality advice versus sensationalism that leaves you thinking....do they really believe their own writing?
I don't know what this writer thought when he posted the notion that to have a reasonable retirement; you need to save 8 million dollars. There is a general rule of thumb that you could live off of your investments drawing out a maximum of 4% per year. His point is that the 4% withdrawal rate rule of thumb is dead. It is an outdated rule based on the time when the ten-year treasury yield was paying out 5%. The rule was to take 80% of the interest rate and live off of it. In 1998 when the rule was written, it was 4%, which is 80% of 5%. If that 5% interest rate goes down, then your assets have to be more because your withdrawal percentage goes down.
Today that interest rate is running at roughly .50%. Thus according to him, you can only withdraw 80% of that .50%, thus the need for 8 million dollars.
You have to go with these assumptions to buy into that theory:
You are going to tie your withdrawal rate to the ten-year treasury yield
I don't know anyone who does that in this environment
There are no other alternatives
You can get a fixed guaranteed annuity for 3% locked in
That the average investor has the capacity to save $8,000,000
I don't think that I need to comment on that one.
Rule of thumb – Broad-based advice intended to apply to everyone is a slippery slope. Get your plan of action, your withdrawal rate, and base it on your particular situation, making realistic assumptions to make it all work. There is not a universal way to go about putting a retirement plan together.