As a mathematics professional I can tell you that what your financial advisor did - what a certified FINRA advisor would do - is something called a "Monte Carlo simulation" in which thousands of scenarios and predictions based on past performance are played out. He/she then let you know that "there is 95 percent probability that your savings will last until you are 94 years old".
This is based on how the market has behaved in the past.
What you need to beware of is something called "sequence of return risks". If the market takes a big downturn early in your retirement, then you will very likely be in the "5 percent chance of failure" I believe your advisor will have mentioned at some point
Financial advisors who do Monte Carlo simulations are those who stress "equities and bonds". But I believe you need a more balanced portfolio than the equities and bonds your advisor wants to put you into. There are annuities - - Yes, there are definitely good ones despite fees - they are difficult to find but will worth it when found. There is real estate which will almost surely keep up with inflation in the long run (even group real estate investing if you fear to be a landlord). Precious metals could be a hedge.
So one bottom line is I believe it is very, very important to diversify beyond equities (stocks/ETFs/mutual funds) and bonds if you want a financially secure retirement for the next 40 years or so, no matter what this advisor said. He gets a commission for what you put in stocks and bonds, not for what you put in real estate, annuities, etc.
I have a financial advisor at Wells Fargo who takes a different point of view from "balanced portfolio of bonds and equities" - He has me in funds that use covered call hedging strategies. Only 10 percent of my portfolio is with him but it has been a great investment. (30% portfolio in my home, 30% in an index annuity and I personally invest the rest of my portfolio.)
Lots of financial professionals - certainly not all - believe we are in for another 'lost decade" (like the 2000s) where you have little more at the end of the decade than you did at the beginning. If your advisor is assuming you can withdraw four percent each year, think what that could do to your portfolio and your future returns. (Only about once every 20 years or less, i.e., about five percent of the time, are we on the verge of a lost decade, but this could be it.)
So...I think this "95% chance of success" might hold true at an "average time" but we are in a "risky time". Just my opinions. Google "sequence of return risk" to learn more.
Then...there is inflation. Your financial advisors software did not have the possibility of strong inflation built into the prediction (the software that made the prediction is not set up for that) and it is possible (not certain) your retirement could be spoiled by inflation, depending on how your investments perform if we get a high inflation scenario.
Last, these Monte Carlo simulations are based on the idea you eventually withdraw all funds and "go broke" at the end - so they are saying there is a 95 percent chance you do not go broke until age 94 when you are likely going to be broke if you live that long. If you live to 94, do you really want to be broke? Do you know how horrible Medicaid nursing homes are and how expensive non-Medicaid nursing homes are?
As for retiring at 55, I did at 60 and I'm very happy. But my hobby of traveling beings me great joy. If you have nothing to bring you a lot of joy for 39 years (until 94), maybe you should stay with your career longer, and earn finances for an even more secure retirement.
PS - Do not let a financial advisor talk you into taking out a mortgage because "you will earn more than the 3 percent your mortgage charges by putting it in investments" (They want you to forget that did not happen in the 2000s). You need an investment that is secure from the possibility of extreme market fluctuation, and essentially, the money in your home "earns" the 3 percent annually you do not pay to a mortgage company. Some of your portfolio must be "low risk/low return" to have a good chance of a financially secure retirement. (And...bonds have been terrible for something like 20 years now. I cannot understand why financial advisors use them but that's just me. There are other "lower risk/lower return" investments that don't require you do invest in bonds....though you should probably have some in bonds just for the sake of diversity...but I do not think it should be a lot.)
|