Nearly two-thirds (63%) of Americans say the country is experiencing a retirement crisis, according to a survey released in January by Clever Real Estate. More than one-third (36%) of retirees say they’ve spent their savings faster than expected and 44% struggle to pay everyday bills.
For example, according to Numbeo, the cost of living in Italy is 32% lower than in the U.S. and in Argentina, it is 53% lower. I’ve also spent time in Brazil, Chile, Uruguay, Hungary and the Czech Republic, and I’ve enjoyed a high quality of life on a low budget in all of them.
You also don’t have to stay forever. Even taking off for a few years of adventure before returning to the expensive U.S. can get you over the hump in retirement.
Most people have never heard of a critical concept in retirement, but understanding it can help you take a more creative approach. The sequence of returns risk is the risk of a market crash early in your retirement, leading you to sell off too many stocks while prices are low to keep the same income flowing each month. By the time the stock market recovers, you’ve gutted your portfolio beyond where it can recover.
Living abroad on a fraction of the budget means avoiding selling off stocks and simply living on dividends, bond interest, real estate income and cash savings.
But that’s not the only creative approach to solving the sequence of returns risk.
If the greatest risk to your retirement portfolio is a stock market crash early on, why not sell off most of your stocks before you retire and buy back in once you pass the initial “high risk” phase of your retirement?
In fact, Bill Bengen, the financial planner who proposed the 4% Rule, now recommends this strategy. In an interview with Afford Anything, he explained how most retirees can use a 5% withdrawal rate through this strategy.
It works like this — you sell off stocks as you near retirement, putting enough money in cash, bonds and real estate to survive for the first few risky years of retirement. You don’t sell any stocks to live on during this period.
After a few years, you then move more money back into stocks. And from there, you practice a 5% withdrawal rate — pulling more money from your portfolio each year than you could have otherwise.
Alternatively, you could go the opposite and put 100% of your portfolio in stocks.
Morningstar reported on a study by several finance professors, which found that a portfolio of 100% stocks performed better on returns and even reduced risk. The “optimal portfolio” in the study comprised one-third U.S. stocks and two-thirds international stocks to provide diversification.
The study found that this “optimal portfolio” produced 50% more wealth for retirees than the traditional 60/40 portfolio mix of stocks and bonds. That means retirees could withdraw significantly more money in retirement with a smaller nest egg.
Even more impressively, the authors found that this “optimal portfolio” had lower risk. They report that the optimal portfolio has a 7.0% chance of running out of money, compared to 16.9% for a traditional 60/40 portfolio.
What if you didn’t have to sell off any stocks to live on in retirement? What if you could live off the dividends and leave your investments to grow in value?
According to Nareit, real estate investment trusts (REITs) average a dividend yield of 4.25%, compared to the S&P 500’s paltry 1.19%.
I invest money every single month through an investment club in private equity real estate. Some syndications and funds pay me a “modest” 3-5% rent distribution. Others pay 5-8% or even more. One fund pays me a 16% yield like clockwork.
Again, it begs the question: Why would you want to sell off any assets at a “safe withdrawal rate” when you can earn a high income without draining your nest egg?
The answer, of course, is that most people don’t understand private equity real estate. Many don’t like the lack of liquidity and the long-term commitment, and others worry about risk.
That’s how asymmetric returns work in finance: You find investments that most people don’t understand, learn how to vet them and that opens the door to finding investments with high returns and low potential risk.
Likewise, I earn 8-12% on debt investments, in contrast to the current series EE Treasury bond rate of 2.6%.
Sure,Treasury bonds come with lower default risk. But I invest in debts secured by real property, with a low loan-to-value ratio. If the borrower defaults, the property is collateral for recovering my money.
For example, I invested 10% interest with a real estate investor I know. He secured my note with a first-position lien against a property worth more than double my loan amount. He pays my interest on time every month, knowing one of his cash cow properties is on the line.
Don’t know any real estate investors and don’t feel like joining an investment club? I’ve also invested money with Groundfloor, which has paid a consistent 9-10% average return since inception.
You don’t have to choose between these options. Mix and match creative retirement savings approaches to stretch your nest egg further and live larger on less.
