Beware Sloppy Retirement Advice

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Recently, I received an email referencing a Wells Fargo Asset Management brochure entitled “New rules of the road: A road map for pursuing retirement success.” That brochure suggested:

How much is enough? Our research indicates that the target should be to accumulate, by the time of retirement, a total retirement account balance that’s 11 times your estimated final preretirement income. For example, for a person whose income just prior to retirement is $50,000, we suggest aiming for a retirement account balance of about $550,000, which is 11 times that preretirement income. Potentially, this amount should replace about 80% of preretirement income when combined with Social Security, which may enable you to enjoy a similar lifestyle postretirement.

At Marotta, our number one customer service tenet is accuracy. This advice from Wells Fargo Asset Management is very sloppy advice. It is both inaccurate and misleading.

Maximum Safe Withdrawal Rates in retirement are one of the most important calculations in financial planning. If your cash flow in retirement is excessive, you will run out of money, and you don’t get a second chance at retirement spending.

Wells Fargo Asset Management’s brochure is implying that you can spend 0.8 times your current salary if you are retiring with a retirement account that is 11.0 times your salary.

There are at least seven major mistakes in this advice by Wells Fargo Asset Management.

1. Your salary is an irrelevant number. What matters for retirement planning is your standard of living as measured by your after-tax spending, not your income or salary. For many, what they spend is only a small fraction of their earnings. For example, households following the FIRE Movement (Financial Independence, Retire Early) or extremely successful business owners may be saving 75% or more of their take home pay. The difference between a household’s salary and lifestyle may be small for some families, but being imprecise even on small matters can result in large mistakes.

2. Wells Fargo appears to be recommending a withdrawal rate of 7.3%. Simple math calculates withdrawing 0.8 from 11.0 is withdrawing 7.3% of your assets (0.8 / 11). Traditionally, safe withdrawal rates at age 65 were governed by the 4% rule. Our calculations are more sophisticated. Our calculations suggest that a 7.3% spending rate could easily run out of money in 17 years. That might be appropriate for a 84 year old, but it is not appropriate for a 65 year old.

3. No retirement age is given for this advice. We have clients who retire at age 50 and clients who don’t retire until age 70. We even have clients who could be effectively retired even though they are in the 20s. Retirement needs to support your lifestyle for the rest of your life. Safe spending rates depend on how old a client is and therefore how many additional years they might live. There is no one-size-fits-all retirement advice.

4. Wells Fargo assumes your lifestyle will diminish in retirement even though in reality it will likely grow. Their advice is assuming that you only need 80% of your pre-retirement income for your retirement lifestyle. This is simply not the case. Clients often spend less money when they are working because they do not have the time to do all the things they would like to do. As a consequence, retirement spending is often higher in early retirement than it was during pre-retirement. Assuming that you will reduce your lifestyle by 20% is presumptuous and usually incorrect.

5. You can’t combine Social Security with safe withdrawal rates. The advice from Wells Fargo suggests that 11 times your final income can meet your spending needs when “combined with Social Security.” In 2019, the average monthly Social Security benefit for retired workers is only $1,461. That is a paltry $17,532 per year. Social Security is capped. There is no way to know what percentage of your final income a fixed dollar amount of Social Security could contribute. For those with large lifestyles, Social Security may be insignificant. Any Social Security Planning must be done on its own. Additionally, Social Security cannot begin before age 62, and it is often best to delay receiving benefits until age 70. For clients who are retiring before age 70, it is important to know how to discount Social Security by calculating the lifestyle which can be spent early knowing that Social Security will begin later in retirement.

6. Asset location is critical to a safe withdrawal rate calculation. The advice from Wells Fargo talks about your “total retirement account balance” as though there is only one type of retirement account. There are many different IRS-recognized retirement account types. Assets in a Roth type of retirement account will never be taxed again. Meanwhile assets in a traditional type of retirement account must be discounted by the tax which will be paid when the funds are withdrawn. And finally, assets in a normal brokerage account are not in any type of retirement account and yet they may be earmarked to support your retirement lifestyle. Had Wells Fargo Asset Management included the descriptor “after-tax” it would have helped clarify their statement, although it still would have been incorrect.

7. This advice leads consumers to do the wrong thing. You are not average and you deserve more accuracy even in general advice provided in a brochure.

There is a reason why accuracy is our number one tenet and clarity is number two. We don’t want to provide simplistic advice if simplifying the advice sacrifices accuracy. It is important that financial planning is both personalized and integrated. It has to apply specifically to you in order to be good advice.

If we were to make a similar but more accurate statement we would have said,

At age 65, we believe the safe spending rate of the after-tax value of assets is 4.36%. This means that the value of your after-tax retirement savings would need to be at least 22.9 times your after-tax standard of living (anticipated annual withdrawals). At other retirement ages a different percentage would apply. We do not believe that your standard of living in retirement will be any less than your pre-retirement standard of living.

The spending adjustment based on your future Social Security benefit is also dependent on your age.

These projections assume a planning age of 100 and an average real investment return of 3% over inflation.

These assumptions should provide an 85% chance or better of not needing to reduce your lifestyle during your lifetime. While no plan is guaranteed, this likelihood is considered success within financial planning.

There is a big difference between needing 11 times your income and needing 22.9 times your standard of living. Precision matters.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)