3 Questions Every Retiree Must Answer

“Peace begins when expectations end.” (Buddha)

INTRODUCTION

Retirement doesn’t look like it used to. In my grandfather’s day, the model went something like this: retire at sixty; enjoy five to ten years of well-earned rest; pass on sometime between sixty and seventy years of age.

This dramatic shift has significant repercussions for how you plan to live in your post-work years. The challenge today is infinitely more complicated than it was for my grandfather’s generation.

However, retirement doesn’t have to be the uncontrollable beast that it’s become.

This article will simplify the retirement-planning process and dispel some of the myths that have served the wealth industry well.

1st QUESTION – How much should I save for retirement?

Ideally, as much as you can. Practically, what you can realistically put away, which is probably more than you think you’re capable of.

The inability to save enough for retirement is a spending issue, not an earning issue. According to the Goldman Sachs 2025 Retirement Survey & Insights Report, around 40% of Americans who earn $500,000 a year say they live paycheck to paycheck.

Having said this, it would be disingenuous to say that someone living on minimum wage can look forward to retirement, especially today. The cost of living has escalated beyond what is reasonable.

However, anyone can improve their financial situation by becoming more “money-conscious.”

MYTH – You need 70% of your pre-retirement income in order to live comfortably in retirement.

Being told that 70% is the magic income-replacement number reminds me of a piece of advice that a boss once gave me: “You should earn your age!” How many forty-year-old CEO’s are making forty-thousand dollars a year, I thought to myself. I realized that this advice was merely a ploy to pay his employees less.

There is a simple way to avoid the unnecessary complexity of designing a “glide path” into retirement: learn to live within your means.

What do I mean by this?

If you’ve managed to live comfortably during your working years, why do you need more money in retirement?

In most cases you won’t be incurring many expenses that you faced during your working years. More importantly, you won’t have to worry about saving for retirement. This alone will free-up some cash.

Trying to match your income-replacement capacity to your desires, rather than adjusting your desires to the reality of your income-replacement capacity, only sets you up for grief.

I always dreamed of being six feet tall, but I had to settle for five feet eight inches. We all have to make compromises.

Here is the key takeaway: Start to get comfortable with the idea that you’re probably going to live in retirement at your current income level.

This adjustment to your expectations has two benefits: First, it gets the retirement monkey off your back. You can dial-down your financial stress level. Second, you can come to terms with the reality of your financial circumstances.

Retiring rich isn’t everything that it’s made out to be.

Having more money creates problems that you can’t begin to imagine. It sounds crazy, but having more than you need can be more destructive than not having enough.

I speak from experience when I tell you that money isn’t the magic-bullet for everything that ails you. Any issues that remain unresolved during your working life will only get magnified in retirement. The underlying insecurities will rise once again. But this time, the money-mistakes will be that much more obvious.

The secret to a happy retirement is tempering your desires, not striving to maintain 150% of your pre-retirement income in your golden years.

2nd QUESTION - How should I invest my retirement savings?

Nothing will blow a hole in your retirement nest-egg faster than a lavish lifestyle combined with silly investment mistakes. There is no shortage of things to spend your money on, no matter how rich you are. Even billionaires go broke!

MYTH – Stocks are too risky to include in your retirement portfolio.

This common misconception is based on a fatal flaw: the definition of risk. In a conventional sense, risk refers to the degree of volatility in the price of a stock. If the price bounces around relative to a benchmark, then it’s considered “risky.” Most investors are very sensitive to temporary price movements because they’re short-term oriented.

The enlightened investor, however, understands that fluctuations in the price of a share has no permanent impact on his financial health. His investment horizon is measured in decades, not days or weeks.

When advisors tell you to put 80-90% of your investment savings into bonds, they’re telegraphing their fundamental misunderstanding of what risk really is. In effect, they’re really saying “I know that you can’t tolerate even a temporary dip in the value of your investments.”

By most measures, they are right. Most investors can’t stomach a market downturn, no matter how small. They panic and head for the exits. Reason gives way to fear.

Invariably, they always regret their decision when the market predictably rebounds and goes on to new heights.

In a strange twist of logic, however, everyone is indifferent to weekly, monthly or annual changes in the value of their home. They don’t think that a five or ten percent drop makes it “riskier.”

This demonstrates how the mind isn’t uniformly rational when it comes to viewing different asset classes.

The enlightened investor knows that risk represents the possibility of a permanent impairment in the value of an investment. He knows that risk has nothing to do with the market price at any moment in time.

While it’s true that one or more of your stocks can go to zero in value, it’s equally true that a bond can get wiped out. The bond issuer can default on interest payments. In a worse case scenario, you might not get your bond principal back.

The assumption that bonds are “bulletproof” is erroneous. Investors embrace them because they offer a false sense of security. But this comes with a price.

3rd QUESTION - How much money can I withdraw from my retirement savings?

The wealth industry has adopted a convenient guideline called the “4% Rule.” It’s intuitive and easy to work with. A $500,000 retirement portfolio will yield $20,000 of annual income at a 4% withdrawal rate. Every year, the amount withdrawn can be adjusted for inflation.

If inflation grows by 3%, the withdrawal next year would be $20,600 ($20,000 X 1.03).

Here is the best part. According to the “4% Rule,” there is a very high probability (close to 100%) that a retiree won’t outlive his money over a thirty-year period.

Set it and forget it. Guaranteed security in retirement.

But there is a catch.

The “4% Rule” assumes that the retiree’s portfolio holds an equal mix of stocks and bonds. And as with all things in life, one size doesn’t fit everyone. If your portfolio isn’t weighted 50% in stocks and 50% in bonds, then the rule isn’t foolproof.

This is because stocks have historically yielded a higher return than bonds. Holding 80% of your retirement portfolio in bonds, for example, will decrease your overall returns. As a result, the chances of outliving your retirement nest-egg will grow proportionately.

Here is a more practical approach: try to match your retirement income with your living needs. In other words, your annual drawdown = what you need to live on.

Forget about all the bells-and-whistles that you envision in your retirement years. If it isn’t going to happen, then why set yourself up for failure?

Here is the “retirement-readiness” profile of a real-life couple approaching retirement.

Betty and Stan expect to receive $16,000 and $22,000 in government retirement benefits, respectively. Stan is also counting on a small annual pension of $12,000 from his current employer.

They have lived a modest but comfortable lifestyle and are happy to continue their current standard of living in retirement. They currently spend about $75,000 annually and aren’t concerned about leaving an inheritance (all of these figures are pre-tax).

As a result of saving prudently and investing wisely during their working career, they have amassed a retirement portfolio of $500,000. According to the wealth industry, they’re defined as “Mass Affluent.”

What does their retirement picture look like?

The combined amount of their government benefits, along with Stan’s employer pension, leaves them with a $25,000 income shortfall. They will need to generate an additional $25,000 in order to meet their retirement-income target of $75,000.

This means that their retirement portfolio will have to generate an annual return of at least 5% (5% X $500,000 = $25,000).

It’s unlikely that an all-bond portfolio will do the job. Betty and Stan will have to lean on reliable, dividend-paying stocks that have growth potential. Otherwise, they’ll have to revise their retirement-income target downwards.

Shooting for the upside potential from a heavier stock weighting makes more sense than facing the prospect of downside from a bond-heavy portfolio.

Regardless of the weighting you decide upon, the return from a portfolio has to always equal or exceed the rate of inflation. If not, steady increases in the cost-of-living will deplete a nest-egg very quickly. This is a risk that you adamantly want to safeguard against going into retirement.