No Translation Necessary

Read any retire­ment plan­ning guide, and at some point they’ll talk about con­vert­ing a “pile of money” into a retire­ment income (often referred to as a ‘with­drawal rate’ or ‘the 4% rule’). This need to trans­late between two amounts is prob­lem­atic for two rea­sons:

  1. It requires a lot of (big) assump­tions1, and
  2. It requires a lot deeper under­stand­ing of invest­ing than most peo­ple have in order to make bet­ter assump­tions.

With the Elephant’s Paycheck, no trans­la­tion is required.

The focus on a pay­check, on income gen­er­ated by invest­ments directly becomes your retire­ment plan.

And, like your pay­check at work (or maybe bet­ter than your pay­check at work!) it has built in infla­tion pro­tec­tion with reg­u­lar raises to sim­plify retire­ment spend­ing plan­ning.

Will You Outlive Your Money?

The com­mon ques­tion, “will you out­live your money?” is not the only ques­tion you should be ask­ing.

What will the qual­ity of your retire­ment be if you’re con­stantly wor­ried about spend­ing too much, or not enough and later regret­ting missed oppor­tu­ni­ties?

In fact, the whole nature of retire­ment is chang­ing and will likely include a more grad­ual reduc­tion in work (and income) over a longer period of time as com­pared with today’s binary “I’m work­ing / I’m not work­ing” retire­ment lifestyle.

These ques­tions along with these changes means you need to man­age your income flow, and likely man­age it for a much longer period of time that you expect. You want to make sure the income you (and your Elephant) are earn­ing is greater than the amount you’d like to spend dur­ing “retire­ment” (while still main­tain­ing a good qual­ity of life dur­ing retire­ment). Even if you’re work­ing part time, under­stand­ing your income rather than your net worth will help you make the best deci­sions on how to spend your time, how much part time work to take on, and so on.

Google search for "4% rule"

Searching Google for “4% rule”… all the top results ques­tion if it even works!

The Fidelity arti­cle, Will You Outlive Your Money?, talks about the with­drawal rate.

Could the arti­cle be more com­pli­cated? Reading it, do you think you could under­stand how to man­age your with­drawal rate over a long period of time? Remember, a mis­take early on in retire­ment is irrecov­er­able, since it’s very dif­fi­cult to go back to work once you real­ize the error. Do you really want the stress of wor­ry­ing about all this dur­ing your retire­ment? Did you see that part about “skip raises”?

Oh, and the 4% rule again, great.

Why set your­self up to trans­late? Why not at least try to man­age a retire­ment blue­print towards income so that you don’t need to totally base your retire­ment plan off of the with­drawal rate?

Tapping into “The Pile”

Of course, man­ag­ing your income flow doesn’t mean you can’t with­draw prin­ci­ple (touch the pile of money you’ve accu­mu­lated). It just means that you have a safety net in that pile. If some­thing should go wrong, unseen med­ical expenses or a down­turn in the mar­ket, you can enhance your income flow by tap­ping into your prin­ci­ple. It’s a sec­ondary thing, instead of your pri­mary method for fund­ing retire­ment. And, because your income and raises increase over­time, if you have a light touch on reduc­ing your prin­ci­ple it won’t have as dra­matic an impact as you might think.

  1. That effec­tively make the whole thing one big guess. 

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