Three Rules To Remember When You Retire

Words: Artie Bernaducci

You may have heard the saying: Rules are meant to be broken. Agreed, but I want to share with you THREE RULES that never let me down…so I didn’t break them. This certainly applies if you are thinking about retiring at some point. 

So, you start looking for different information online, talking with friends, your professional advisors, and so on. All that helps for sure, but sometimes it can make it even more confusing because opinions clash and there is too much information out there bombarding you.

Well, having been a mason long ago, I wanted to keep my plans simple because I wasn’t very knowledgeable about financial things back then.

This led me to look at the financial landscape, and I hit every nook-and-cranny I could find. Then after absorbing it all (over the years), I drilled it down to three simple rules I followed and wanted to share them with you. 

Here they are:

RULE #1: LOSSES HURT MORE THAN GAINS HELP!                              Imagine that you found a stock that you wanted to invest in for whatever reason and put $100,000 in it two years ago. 

It made 60% for you to your delight, and that year ended with you having $160,000. Nice.

Year two came along, and now you’re down 40%. So, you do some quick math in your head and say, “In year one, I was up 60% and year two down 40%. Well, I am still up 20% and have about $120,000. That means I averaged 10% a year, and that isn’t a bad deal, right?” 

Well, not exactly. 

Here's the problem: you have to marry the math with your money. Let's do the math again—$ 100,000, in year 1. You were up 60%. 60% of 100,000 is $60,000, so added together, you're at $160,000. 

In year 2, you're down 40% of the 160,000. That equals $64,000. If you subtract the $64,000 from 160,000, you're at $96,000- not $120,000 like you thought.

You averaged 10% per year, or 20% total over the two years, and still lost money! 

That is what is meant by “losses hurt you more than gains help!”

Here is another view: You lose 10% on $100,000. How much do you have to make to offset the loss? Do the math: $100,000 - 10% = $90,000. 

You have to make up the $10,000 off of the $90,000, which means you have to make up 11% gain to offset that 10% loss. 

Now, let's do it one final way: What if you had a 50% loss? You would need a 100% gain to offset it! 

Here’s the math: Start with $100,000 and lose 50%. That leaves you with $50,000. Now you need another $50,000 to get back to $100,000. That requires a 100% return to get back to square one!

Losses are always more impactful and more powerful than gains. Please keep that in mind. 

RULE #2: LOSSES HURT MORE WHEN YOU TAKE INCOME!     Losses are bad enough, but it gets worse when you take income. Here's why: Using the same $100,000, the market is down 20% in a bad year ($20,000). You also took out $4,000 for income. 

So, your $20,000 loss is now really a 24% loss (20,000+4,000). You now only have $76,000 left over: 100,000 – 24,000 = 76,000. 

Now let’s look at what kind of return you would need to recover if you were to lose a percentage due to a market decline based on two scenarios: not taking money out for income AND taking a 5% withdrawal for income.

• A loss of 10% in the market would require an 11.11% return to get back to “even.” If you took 5% out for income on top of the loss, you would need a 17.65% return.
• A loss of 20% would require a 25% return if you don't take income and a 33.33% return if you do take the income. 
• Finally, a loss of 30% loss would require a 42.8% return to get back to where he started, and if you took income, it would take a 53.85% return.

See how losses hurt more with income?

Finally…

RULE #3: REMEMBER ‘THE RULE OF 100’!

Let’s take a look at it.  

When you were younger, you had a longer time horizon before retirement and could take more risks with your money. Generally, when you are older, it is advisable to take less risk with your money. 

To show this, let’s use an example where you were 25 and your parents were 65.

The ‘RULE of 100’ is an equation we can use to help kind of figure out about how much risk people should consider taking based on their age.

You subtract your age from 100. The remainder is the amount that you could have at risk. It is a rule of thumb and helps provide some general guidance. 

At 25, if we use this rule, it would be 100 – 25= 75. That means that roughly 75% of your money could be at risk, whereas 25% should maybe be safe. 

What about your 65-year-old parent? Again, take 100-65=35. Roughly 35% of their money should be at risk, but 65% should be safe. 

When we talk about safe money and money at risk, what are we talking about?

Risk accounts refer to stocks, bonds, mutual funds, ETFs, Variable Annuities, Limited partnerships, etc.

Risk simply means there is a potential to lose money. 

When we refer to Safe accounts, that means your principal is either insured or guaranteed by some entity — these include cash, CDs, Individual government bonds, fixed annuities, fixed indexed annuities, etc.

So, there you have it… three simple rules to remember before you retire, as you are working towards retiring, when you retire, and throughout retirement! 

I hope you gained a benefit by reading this article because I certainly did by practicing these rules.

To sum it up, I am an optimist and believe that our best is yet to come. However, that only happens if you make smart choices with your money.

When the time comes and you retire, my wish is to get to live your life the way you want because you have all the financial resources you need. 

PLEASE NOTE: Examples given are hypothetical and are for illustrative purposes only. They are provided to help demonstrate a mathematical principle. They do not represent any specific product or service and are not indicative of past or future results. Investing involves risk.