The Ideal Financial Scenario In Retirement: Conservative Returns, Steady Income

Financial loss creates stress. And given stress kills. your goal as a retiree should be to remove as much stress from your life to live as long and happy as possible.

Recently, I’ve been thinking about being OK with no longer making a lot of money from investments. With such huge returns in the S&P 500 and the SF real estate market since 2012, I kind of feel like Anthony Bourdain when he said,

“I should’ve died in my 20s. I became successful in my 40s. I became a dad in my 50s. I feel like I’ve stolen a car — a really nice car — and I keep looking in the rearview mirror for flashing lights. But there’s been nothing yet.”

I got in trouble the summer before starting college and could have easily given up on my future. But in college, I met my wife and landed a hard-to-get job for someone with my lack of pedigree.

Two months before likely being terminated at my first job as the internet bubble burst in 2000, I was able to find a new job in San Francisco for a raise and a promotion.

Instead of selling a home close to the bottom of the market in 2012, I was blessed to have a lackluster agent who couldn’t sell a beverage to a parched traveler in the middle of the Sahara.

Instead of flaming out with Financial Samurai and having to go back to work a couple years later, this site has become a viable source of income to support my family.

Sure, there have been plenty of setbacks as well, but I’ve chosen to focus on the positives because life is better this way.

With low returns and a stable income, life becomes magnificent in retirement. All the worry about running out of money or having to go back to work full-time starts to fade away. 

Conservative Returns And A Steady Income

Anybody who has been reading Financial Samurai since 2009 should be much wealthier today. And if you are the Financial Samurai, then you’ve also done well. Thus, when I think of de-risking over the next several years, I don’t see it as quite the atrocious move that some make it out to be.

Everybody is at a different financial stage in life. I’m not sure why we have to project our stage onto others as the only right way. For those who are looking for ways to de-risk or profit during a downturn, I’ve presented some logical ideas to consider. I’m sure there are many more, like selling out of the money call options.

It’s obvious that in 30 years, the stock market and real estate market will be higher than it is today. Just by the Fed having a target 2% inflation rate tells you that assets will continue to go up by at least 2% a year over the long run.

In 30 years, I’ll be in my 70s, wistfully reflecting on all the years gone by. Sure, if I had stayed the course and continued to aggressively invest in risk-assets and never spent a dollar of my gains I’d be wealthier. But would I be happier? Probably not. Would I be disappointed for losing 20%, 30%, 50% of my investable assets in the second half of my life when I could have conservatively made 3% – 5% a year, forever? Absolutely.

I’m stuck with a frugal mindset that makes it impossible to spend more than 50% of our income or ever draw down retirement principal. When my wife and I die, we know we’ll be donating or passing down the majority of our wealth to our son. Therefore, inviting unnecessary money stress due to excess risk taking at this point is our lives is illogical. It’s illogical for anybody who has reached financial independence.

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Related: Various Portfolio Compositions To Consider In Retirement

Stress-free Wealth Creation Feels Great

Action item: I’d like everyone to calculate their annual gross income, net income, and absolute savings amount and divide them by your current net worth. You now have a good idea of your minimal annual net worth growth rate assuming a 0% investment return.

My percentages are roughly 10%, 7%, and 5% respectively. In other words, I’ve got a 30% effective tax rate, save half my gross income, save 70% of my net income, and am able to grow my net worth by about 5% each year from savings alone. I could probably increase that figure to 6% if I really cut costs. But I’m trying to kick my frugal habits now that I’m over 40.

For the sake of illustration, if I dump my entire net worth into a 10-year treasury bond yielding 3%, I’m now growing my net worth by 8% each year.

At an 8% growth rate, in nine years, I will have doubled my net worth. In 18 years I will have tripled my net worth. And in 27 years, I will have quadrupled my net worth with very little risk or stress. How is this not an awesome return?

A 5% net worth growth rate based on my current income isn’t impressive. Some of you are probably able to grow your net worth by 100%+ each year through your income and savings. But don’t feel sorry for me. I’ve found a happy place where I’m satisfied with the amount of risk, reward, and effort required to maintain such a growth rate.

Of course, your income might decline or go away. But hopefully, you will have built passive income streams, receive a pension, or earn social security income so that there’s always some form of income coming in. In my case, it’s passive income and online income until social security kicks in 30 years from now.

Examples Of Being OK With Low Returns

Here are three realistic examples of retirees with steady incomes and low investment returns. They’ve all decided to take things down a notch because their annual expenses are fully covered without needing to work full-time. They have paid off homes and never have to draw down principal to fund their respective retirements either.

Example #1:

A 63 year old couple who lives in Des Moines with a paid off house and an annual budget of $34,000.

Net worth excluding primary residence: $500,000

Social Security Income: $18,000 (3.6% of net worth)

Dividend income: $10,000 (2% of net worth)

Annual net worth growth: $20,000 (4% capital appreciation)

Total available gross income/capital: $48,000 (9.6% annual growth)

Example #2:

A 45 year old couple who lives in San Francisco with a paid off house and an annual budget of $240,000.

Net worth excluding primary residence: $5,000,000

Passive income: $140,000 (2.8% of net worth)

Part-time consulting: $60,000 (1.2% of net worth)

Annual net worth growth: $250,000 (5% capital appreciation)

Total available gross income/capital: $450,000 (9% annual growth)

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Example #3:

A 67 year old couple who lives in Manhattan with a paid off condominium and an annual budget of $350,000.

Net worth excluding primary residence: $10,000,000

Passive income: $250,000 (2.5% of net worth consisting mainly of dividends)

Pension income: $120,000 (1.2% of net worth)

Annual net worth growth: $400,000 (4% capital appreciation)

Total available gross income/capital: $770,000 (7.7% annual growth)

If The Direction Is Correct

Below is a recommended net worth growth rate chart by age to consider. When you’re just starting out with nobody to care for but yourself, you should be experiencing tremendous net worth growth each year. You’ve got plenty of time to make up for errors or investment losses in your 20s.

Even though your earnings power grows in your 30s and 40s, your net worth growth rate will likely slow as your net worth and expenses grow. This is the sandwich age where you may be providing for children and taking care of your parents.

Hopefully by the time you reach 50, your net worth will be at least 20X your annual expenses. As soon as you get to 20X annual expenses, you can start considering downshifting or leaving an undesirable job altogether. If you can get to 20X your annual expenses at an earlier age, all the better.

By the time you have your “enough money,” there’s really no need to shoot for greater than a 5% annual return. If your net worth is indeed 20X your annual expenses or more, simple math dictates you can live off your net worth forever and never touch principal with a perpetual 5% return.

Recommended Net Worth Growth Targets By Age

My favorite Chinese proverb is, “If the direction is correct, sooner or later you will get there.” You are welcome to take more risk to expedite reaching financial freedom. In fact, I encourage you to take all the risk in the world in your 20s or before you have a family.

I’ve always had a minimum net worth growth target rate of 10%. Thanks to a strong recovery and this site, my net worth growth rate has been higher since I left full-time work in 2012. But after not seeing any lights flashing in my rearview mirror for so long, I’d like to keep it that way by dialing down risk.

Related:

Recommend Net Worth Growth Rate Targets By Age

How Does It Feel To Be Financially Independent?


Readers, how much is your net worth getting boosted by your savings each year? What’s the point of taking so much risk if you already have enough to be happy? Is it really wise to just stay the course forever and never spend any of your investment money? If so, what’s your purpose of investing?

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