For many individuals nearing retirement, one of the biggest questions is: “Have I saved enough to retire comfortably?” This concern becomes even more prominent when faced with the financial risks of retirement, such as the possibility of a market downturn early on or unexpected expenses. In today’s blog post, we’re sharing the story of David, a 61-year-old plant biologist turned chemist, who is eager to retire with about $530,000 saved. He’s looking for a roadmap to ensure his savings last through his retirement, and he’s particularly concerned about sequence of return risk—the risk of poor market returns in the early years of retirement, which can significantly deplete savings.
Let’s walk through David’s plan and see how he can retire confidently, despite his concerns.
The Commute: A Sign That It’s Time to Retire
David has spent years working hard and building his career, but the daily grind has taken its toll. His long commute—up to three hours on some days—has become exhausting. He’s more than ready to retire. He’s planned the first year or two of retirement, focusing on tutoring, spending more time with family, and even learning to play the piano. Yet, like many in his situation, he’s not sure if his savings are enough to sustain him for the rest of his life.
With a portfolio of $530,000, split across 401(k)s, IRAs, and taxable accounts, David is in a relatively strong position. He’s mortgage-free, which is a significant advantage, but he still faces high property taxes, a common issue for retirees who want to stay in their family homes. With no plans to downsize, he needs to ensure that his savings can cover his ongoing living expenses.
The Financial Challenge: Can David Retire Now?
David’s biggest concern is how to manage his finances in retirement without running out of money. Specifically, he’s worried about sequence of return risk—a situation where poor market performance in the early years of retirement, combined with withdrawals from his savings, could have a significant impact on his financial future.
To understand whether David can retire comfortably, we need to look at his projected withdrawal rates. In his first year of retirement, he’ll be withdrawing about 5.4% to 5.6% of his portfolio, which is slightly above the commonly recommended 4% rule. The 4% rule, while a useful guideline, isn’t a perfect solution, especially in today’s uncertain economic environment. However, David’s situation isn’t as risky as it might seem at first.
Once David starts receiving pension payments and Social Security benefits, his withdrawal rate will drop to a much more sustainable 1%. By age 75, required minimum distributions (RMDs) will increase his withdrawal rate slightly, but it will still remain manageable. This temporary higher withdrawal rate at the start of retirement is not ideal, but it’s a short-term issue that will resolve once additional income streams kick in.
Sequence of Return Risk: How to Minimize It
One of the most important strategies for minimizing sequence of return risk is diversification. David’s portfolio is currently split between stocks and bonds, which helps mitigate risk, but there are additional steps he can take. For instance, David has most of his IRAs in target-date funds, which automatically adjust the mix of stocks and bonds as he ages. However, in retirement, it can be more beneficial to separate stocks and bonds into different accounts. This allows David to draw from the safer, conservative assets (like bonds) when the market is down, rather than selling stocks at a loss.
By maintaining a diversified portfolio with a 70/30 stock-to-bond split, David can reduce the impact of market downturns. This strategy allows him to draw from bonds during periods of market volatility while letting his stock investments recover.
Lifestyle and Budget: Living Fully in Retirement
Retirement isn’t just about surviving—it’s about thriving. David wants to spend around $2,000 a year on travel and gifts for the first 10 years of retirement, and he’s budgeted around $2,400 per month for living expenses. Even with these discretionary expenses, David’s portfolio remains sustainable. In fact, his projections show that even if he spends more in these early years, he’s likely to have more money at age 90 than when he started.
One of the critical decisions David faces is whether he wants to preserve a large portfolio for his children or focus on enjoying life now. His sons are financially self-sufficient, so David has the freedom to spend more and focus on living a fulfilling life in retirement. For many retirees, striking the right balance between preserving wealth and enjoying life is a central challenge.
Flexibility with Social Security
Another key aspect of David’s retirement plan is the timing of his Social Security benefits. While he plans to retire in the next month or two, he can be flexible with when he begins collecting Social Security. If the market performs well in the first few years of retirement, David can delay taking Social Security, allowing his portfolio to continue growing. If the market performs poorly, he can start collecting Social Security earlier to reduce the pressure on his investments.
This dynamic approach to Social Security is an essential part of a successful retirement plan. It allows retirees like David to adjust their strategy based on market conditions, ensuring they can maintain their lifestyle without depleting their savings prematurely.
The Bottom Line: David Can Retire Now
After carefully reviewing David’s financial situation, it’s clear that he’s in a strong position to retire now. His withdrawal rates, while slightly high at the beginning, will decrease once his pension and Social Security benefits begin. His diversified portfolio and dynamic approach to Social Security provide additional safeguards against market volatility and sequence of return risk.
For David, and for many others in his situation, the key to a successful retirement is not just about surviving financially, but about living fully and enjoying the fruits of years of hard work. By managing his investments wisely and remaining flexible with his Social Security strategy, David can confidently retire now and look forward to many fulfilling years ahead.
If you’re nearing retirement and wondering if your savings are enough, David’s story shows that with careful planning and a balanced approach, it’s possible to retire comfortably even in today’s uncertain financial landscape.
