How much money will I need for a safe retirement?

The best answer I can give is that there is no such thing as a typical answer. You need to throw out all rules of thumb and simple formulas and understand that only by reviewing your personal situation will you discover the right answer. In my 16 years of advising clients, I have seen nearly every situation imaginable and have learned that no magical number or rule can be applied.

To illustrate, in our work with professional athletes, it’s not uncommon to see individuals who spend as little as 10 percent of their life expectancy earning their money, while spending more than 60 percent of their life expectancy trying to live off that money. The probability analysis we use often produces an incredibly wide variance in results, making it nearly impossible to create a high degree of certainty that they will never run out of money—regardless of how much they have.

On the flip side, among entrepreneurs and corporate executives, it’s not unusual for clients to never truly retire. Many continue earning income well beyond the normal retirement age through consulting or serving on corporate boards. These individuals may spend 60 percent of their life expectancy earning money and less than 10 percent drawing down their nest egg. For them, probability analysis shows it’s statistically improbable they will ever run out of money, and many will leave large surpluses at the end of their lives.

Another key factor is spending habits. It is often assumed that expenses drop dramatically in retirement, but this is rarely the case. Lifestyle in retirement is usually a continuation of spending habits formed during working years. Those who are disciplined savers tend to reduce expenses further in retirement, while those who spend freely often continue a more lavish lifestyle. This is why the question of “how much it takes to retire” cannot be answered without detailed financial planning and a clear understanding of the client’s career goals, spending patterns, and overall approach to saving and money management.

The Real Estate Fallacy

Residential real estate values can be deceptive in a declining market; reduced prices from peak levels may not be the bargains they appear to be. When assessing whether real estate is properly priced, it’s important to apply the concept of reversion to the mean.

From the late 1990s through 2006, many believed it was normal for home values to appreciate by double digits annually. However, a study released by Fidelity Investments in 2007 revealed that from 1963 to 2006, U.S. residential real estate grew at an average annual rate of just 1.35 percent. During that period, there were three sharp downturns, including the recent collapse that wiped out as much as 50 percent of property value in less than five years.

By comparing the historical rate of return for a particular area with more recent returns, you can determine how much a property’s value should decline to bring its annual return back in line with the historical average—its reversion to the mean.