Q&A of the day – Retirement planning without Social Security
It’s the Q&A of the day. Each day I’ll feature a listener question that’s been submitted by one of these methods.
Email: brianmudd@iheartmedia.com
Twitter: @brianmuddradio
Facebook: Brian Mudd https://www.facebook.com/brian.mudd1
Today’s question was submitted by Robert…
At some point in the future, what about (covering the) topic of early retirement. The 4% formula, maxing out Social Security and having 70% income of current salary are inclusive. But I actually am planning for a future to NOT include Social Security to still achieve the goals and at an earlier age if possible.
Bottom Line: Hi Robert, this is actually one of my favorite topics that I haven’t discussed specifically in at least a few years. First, regarding Social Security. According to the trustee’s most recent annual report, 2034 is the date of initial insolvency when benefits will begin to be cut without significant reforms. I felt inclined to address it before delving deeper into the topic. As for retirement planning, I’ve never believed in plans that are based on principal reduction overtime. That's to say that I don’t buy into the 4% plan or any like version of it – except for the exceptionally wealthy. My preferred path for retirement planning is exceedingly simplistic in the approach and provides a clear road map/timeline for execution.
My first rule of retirement is that “a mortgage isn’t a retirement plan”. That’s to say that I’m not beginning the conversation until your home is paid for along with all other debt obligations being resolved. From there it’s about streams of income. The biggest failure of principal reduction plans is that they all run the risk of you running out of money if you live a long healthy life and/or if there’s a significant negative event that impacts your investments for a sustained period of time when you’re still withdrawing money to live on.
Once your debt is resolved account for all of your average annual expenses. Then add 10% to them to account for any variables that come about and extras you may want. When all of your residual streams of income reach that level – you're ready for retirement. Residual streams can include:
- Pensions
- Dividends from investments
- Interest from investments
- Annuities
- Social Security
I put Social Security in there last because you mentioned that you want to account retirement without relying on the payouts. Hopefully that’s helpful. It can also be fun as you near your target as well.