At the end of our career we want to enjoy a fulfilling retirement. To achieve that we must plan ahead. We must save and invest to meet projected financial needs in retirement, and we must identify physical and intellectual pursuits to remain vibrant and healthy through our golden years. The focus of this chapter is on the former—the financial preparation (saving and investing) needed to achieve a dignified retirement.
As I’ve emphasized in earlier chapters, during our working years the objective is to accumulate diverse appreciating assets.
In retirement our objective shifts to ensuring we have adequate monthly income to meet our various needs.
These two objectives are related but not identical. For example, storing a collection of gold bars in a bank vault addresses our asset accumulation objective, but physical gold holdings don’t pay interest or dividends. In retirement we need steady cash flow, making gold impractical.
We’ll begin this chapter with a concept I call Golden Goose Principal. (I do mean principal—not principle). Subsequently, we’ll move on to cover: defined contribution and defined benefit retirement plans, 401(k), 403(b), and individual retirement accounts (IRAs), preparing for retirement, and tools such as budgets and forecasts to assess progress toward retirement goals.
For the sake of completeness, we’ll also cover Social Security benefits, although given the program’s precarious future I recommend ignoring it in your retirement planning.
The Great Retirement Unknown
If you’ve mastered budgeting and time value of money and you know the exact date at which you’ll die, retirement planning is a simple exercise: Simply build up a nest egg during your working years, draw it down in retirement, and die exactly when your net wealth equals zero. Economically, that represents blissful perfection.
The problem, of course, is that we don’t know when we’ll die!
Despite this significant shortcoming, much of the existing advice in this space hinges on our ability to somehow make a reliable longevity forecast. The most common guidance is to compile a nest egg that will last until age X if we draw down 4% of the principal annually.
It’s noteworthy that this annual drawdown percentage used to be higher but had to be revised downward as life expectancies increased and nest eggs declined due to a series of economic shocks (the dot com collapse, the Subprime Crisis, and the most recent Coronavirus outbreak). There are some advisors suggesting that the correct annual withdrawal number is 3.5%. Many retirees can’t make ends meet on withdrawals of 4%, let alone 3.5%.
These circumstances are very stressful, because we can’t afford to still be alive after our nest egg balance declines to zero. And none of us want to pursue the obvious mathematical solution—which is to die early. For many low-earning Americans, outliving one’s nest egg is a sad reality.
Doctors, who typically earn above the 90th percentile, can avoid the stresses associated with the inadequate deplete-your-nest-egg-on-your-death-bed model. They can instead strive to attain what I call Golden Goose Principal (GGP). GGP is explained in the next section.