Retirement Planning: Plan for Your Retirement Effectively

Throughout the 28-year career of Theodore Johnson, he worked his way up at UPS to Vice President of Industrial Relations and his annual salary never exceeded $14,000. Despite this, Johnson amassed a $71 million wealth after his retirement and donated more than half this wealth, $36 million, for education.

How did this man do it? Is there a legal way for an employee earning a few thousand dollars annually to retire as a millionaire? Theodore just planned for his retirement early and smartly.

Early in Johnson’s career, his counselor advised him to save 20% of his income and invest it in preparation for retirement. He acted on this advice and his wealth was around $700.000 when he retired in 1952 at age 52. He invested in equities until their value reached about $71 million in 1991, according to The New York Times at the time.

The Most Important Thing in Your Life

Early retirement planning is a necessity regardless of wealth or income. Retirement is a growing challenge with higher life expectancy during retirement and the rising cost of long-term care which require more financial resources during retirement and old age.

Planning for retirement requires a careful assessment of many vague factors like the expected investment returns, lifespan and health. It also requires consideration of unexpected events, such as unemployment or illness close to retirement. Early retirement planning is essential to cope with difficult situations after retirement when the main source of income stops.

Many think that retirement planning can be delayed to an unspecified date. This is a mistake for which they will pay later. To ensure the same standard of living during retirement, planning must start now to generate a passive income alongside their main income or wealth. This can only be attained through investment.

Investment ensures the growth of savings over the years thanks to the power of compounding as investment returns are reinvested to allow retirement with a decent standard of living, support your family, and be prepared for unexpected expenses, especially medical ones.

Investment is the Solution!

If you earn $50.000 annually and save 10% monthly, you’ll have $5.000 annually in savings. If you deposit this amount in a savings account that pays 1% interest per year, you will have just $208,000 after 35 years. If you invest the same amount in the stock market with an average return of 7% annually, you will have more than $750.000 after 35 years. With the same return, this amount could surpass $1 million over 40 years.

Reaching retirement age with only your pension salary and limited savings or wealth will not allow you to maintain the same lifestyle or support yourself or your family for long. This is the fate that most people choose, intentionally or otherwise.

In the US for example, data from the Center for Retirement Research at Boston College and from the Consumer Financial Protection Bureau show that about 50% of retirees reduced their spending or due to the lack of financial resources after retirement. Most retirees in a rich country like the US end up depending on their retirement pension, which usually accounts around 40% of their average salary before retirement.

This is due to ignoring early retirement planning. According to a study by the Transamerica Center for Retirement Studies, nearly 63% of US employees and workers do not have sufficient knowledge about the importance of investment for retirement. Only 35% work on their retirement plan with professional financial advisors and managers.

Even the Wealthy May Run Out of Money!

How much money should be set aside from one’s income or wealth to plan for retirement? In what assets should the retirement planner invest and how much? How much money do people need during retirement? What is the maximum amount to withdraw each year to cover living expenses during retirement? These questions are some of the critical financial decisions that must be considered. The 4% rule.

In October 1994, US financial advisor William Bengen published a research paper in the Journal of Financial Planning discussing a rule called “SAFEMAX” that became the golden rule in retirement planning that claimed success in nine of 10 scenarios.

Put simply, this rule states that wealth can last for 30 years if one limits spending to 4% of one’s investment portfolio. For example, if your investment portfolio is worth $1 million when you retire, according to the Bengen rule, you can spend $40,000 (4%) of your portfolio annually for 30 years, adjusted for inflation regardless of financial market fluctuations.

Unfortunately, this rule may no longer apply with the changing market and economic conditions. For example, US investment bank JPMorgan forecast that retirement planning based on the 4% rule could make even the world's wealthiest people run out of money eventually.

Assuming you are 60 years old with a taxable $30 million portfolio, then according to JPMorgan analysts you will definitely run out of money in 30 years if you spend 4% of your portfolio ($1.2 million) annually. Whether your wealth at retirement is $3 million, $30 million or even $30 billion, the result is the same: money will run out in the end.

JPMorgan analysts suggest spending a maximum of 2-3% of the portfolio value annually with professional portfolio management to maintain the performance of the remaining investments.

The Family Office: A Leading Provider of Retirement Solutions in the Gulf

The Family Office, a leading wealth management company headquartered in Bahrain, is among the most prominent providers of smart retirement planning solutions in the Gulf. With over 18 years of experience in international markets, the company helps those who wish to plan for their retirement to achieve and maintain their income and lifestyle goals with plans to preserve and grow their wealth.

The Family Office builds a personalized investment strategy for each client, offering exceptional solutions and allowing them to make the right decisions from the beginning to achieve their retirement goals with objective investment options.

In 2022, The Family Office launched the first-of-its-kind digital wealth management platform in the GCC allowing investors to discover global investment opportunities in private markets, build a customized portfolio and simulate its performance for more than 10 years in a few minutes. Investors can also access insights and investment analytics simply by creating an account on this innovative platform. They also access global opportunities that were once limited to the largest investors and build a portfolio that suits their investment style and risk appetite.

Sign up to the platform on the link: Join our platform.

Sources: Argaam – The New York Time – Journal of Financial Planning – Hamilton Project

About The Family Office:

The Family Office in Bahrain and its Riyadh-based wealth manager, The Family Office International Investment Company, are regulated by the Central Bank of Bahrain and the Capital Market Authority of Saudi Arabia, serving hundreds of family and individual investors. The firm helps clients achieve their wealth goals through custom-made investment strategies that cater to their unique needs. 

Disclaimer:

The Family Office Co. BSC (c) is a Category 1 Investment Firm regulated by the Central Bank of Bahrain, C.R. No. 53871 dated 21/6/2004. Paid Up Capital: $10.000.000. The Family Office Co. BSC (c) only offers products and services to ‘accredited investors’ as defined by the Central Bank of Bahrain.
 

The Family Office International Investment is a joint-stock closed company owned by one person. Paid-up capital: SAR 20 million. CR No. 7007701696.  It was licensed by the Capital Market Authority (No. 17-182-30) to carry out arranging, advisory and managing investments and operating funds, with respect to securities.