You have done pretty well for yourself with
all the work that you’ve put in over the years.
The kids are through college and launched on
careers of their own. You’ve built up substantial
balances in your retirement plans, put aside
a good-sized rainy day fund and insured yourself
against every conceivable catastrophe.
You have dreams and aspirations for life beyond
the daily grind. Now you suspect that you are
ready to enter that next phase of your life,
but you want to be sure that you have the resources
to live it as you intend. Perhaps it is time
to do some serious thinking and planning about
retirement.
Consider your costs.
You will have to begin with a hardheaded estimate
of your retirement expenses. Although many sources
tell you that you can maintain your lifestyle
with 60% to 80% of your pre-retirement income,
the reality can differ greatly with the style
of life that you have in mind. If you plan to
relocate to a less costly community and spend
your days catching up on your reading at the
local library, your expenses may be modest.
On the other hand, a year of serious globe-trotting
or shuttling between summer and winter retreats
easily can consume more than your current income.
Will you still be making mortgage payments?
Do you plan to help with the expense of a grandchild’s
education? Does family history suggest that
you will need to contend with chronic illness,
or live far beyond your allotted three-score
years and ten? Do you intend perchance to do
some consulting after retirement? Do you have
a philanthropic urge? All factors of this sort
should figure into your income requirements.
Nor should you forget the income tax that will
be due unless that income is derived from tax-exempt
municipal bonds, Roth IRA withdrawals, or the
nontaxable portion of your Social Security benefit.
Don’t forget inflation.
Then you will have to factor in a presumed rate
of inflation throughout your retirement. Even
at today’s modest rates, inflation gradually
will boost the amount that you will need to
finance your intended lifestyle. Retiring today
at age 60, you may be looking forward to 30
or more years of retirement. Just 3% inflation
will reduce the purchasing power of your dollar
by 59 cents over the course of 30 years. The
capital that you have available to support your
retirement must produce income enough not just
to support you at the level of your needs for
the first year, but also to increase each year
to cover rising costs. The accompanying table
shows how long a nest egg can continue providing
a stream of income rising by 3% each year under
various earnings assumptions.
Ready?
The question is whether your resources will
support you through the retirement that you
envision with a comfortable margin of safety.
It’s not rocket science, but the calculation
does call for a number of facts, suppositions
and estimates. You could crunch the numbers
yourself if you are handy with a spreadsheet
or use one of the retirement planning aids provided
in financial books and magazines, software programs
and Internet sites. On the other hand, if you
would like some help with the arithmetic, we
would, of course, be happy to provide it.
Either way, you will start by toting up your
current and expected assets. Your current balances
in retirement accounts, as well as unsheltered
savings and investments that you do not intend
for more immediate use, form the basis of your
nest egg. Factor in your projected Social Security
and pension benefits. An expected inheritance
or a judgment due you can add to the total.
Home equity also can contribute if you intend
to move to a less expensive home.
With your projected expenses and available
resources, all that is needed to complete the
calculation are assumptions as to (1) the rate
of inflation, (2) the expected return on your
investments, and (3) the number of years that
you will spend in retirement. Because you cannot
be sure of any of these factors—or of tax rates
or the state of your health in the future—it
is prudent to be conservative in your estimates.
As our table demonstrates, with large enough
returns, withdrawals kept small enough, and
a reasonable rate of inflation, a given nest
egg may last for a long, long time.
The opinions voiced in this material are for
general information only and are not intended
to provide specific advice or recommendations
for any individual. To determine which investment(s)
may be appropriate for you, consult your financial
advisor prior to investing.
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