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June, 2012


Here are five easy steps to get you the funds you need for a life of Riley (and the earlier you start, the easier they are):

1. Save and invest some of your earnings. Generally, the more funds are put into savings and investments, the better off one is in attaining retirement goals. Especially if fortunate in the kind of employment situation one has, he or she may well be able to set aside much of this in tax-deferred accounts, such as 401K plans, Self-Employment IRAs, regular IRAs, Roth IRAs, etc.

2. Determine the amount in today's dollars required for the desired retirement lifestyle. As a rule, it is no problem to calculate this value. Merely look at what disposable income is needed today. Use that figure.

3. Estimate what part of that income will be coming from outside. This usually means things like pensions or employer-sponsored retirement annuities (for both of which only a diminishing minority is still eligible) plus Social Security income (on average about $14,000-15,000 a year). One hears a lot of discussion in Washington these days about the viability of Social Security for the future. While there almost certainly will be means testing at some point, and the age one needs to be to first be eligible to receive Social Security checks will no doubt be going up, chances are Social Security in some form will still be around and providing monthly income in 30-40 years. One can go to online sites for help with calculating likely amounts one can expect to receive.

4. Subtract the result in #3 above from that in #2. This gives the amount that will need to come from one's own savings, insurance company annuities, and investments. Say your family's disposable income needs today come to $50,000 a year, there will be no pension, and the combined total estimated for husband and wife from Social Security comes to $20,000. The difference is $30,000 which must be covered annually from one's own financial plan.

5. Sit down and do not have an anxiety attack, but now multiply the amount from #4 by twenty. In the example above, our average, hypothetical couple will need 20 times $30,000 = $600,000, over and above whatever they might receive from employer or federal retirement benefits, to live a comfortable lifestyle in retirement. Why so high? Three reasons:

  • First, given the normal downs and ups of the markets, only a small percentage of one's nest egg can be used for expenses each year, or one will quickly run through all one's resources. Suppose there were a major downturn in the equity markets soon after retirement, as indeed happened with me (twice) and with many others over the past few years. Maybe one started with $300,000, which became $200,000 after 2002 and $125,000 after 2008. Even with modest annual gains later, if one were to take one's needed $30,000 or so a year out of that net asset value, everything would probably be gone in less than five years.

  • Second, while we of course cannot be certain of it, life expectancy after retiring can be longer than in one's primary career. About a third of women who retire at 65 live on to 90 or older. One needs a nest egg large enough to provide income for a sufficient duration. It is all "well and good," in one sense, if a nest egg of half a million bucks has been set aside and then one drops dead the year after retirement. One's heirs, at least can benefit. However, far worse is the situation of someone who outlives her or his resources only a few years after retirement. One hears horror stories of old people living without heat in winter or AC in summer, even sharing a pet's vittles, to just get by from one monthly Social Security check to the next because they burned through their nest eggs early and then still lived on many more years.

  • Finally, inflation is a grim fact of life most of the time, and even modest levels of it can make a huge dent in one's buying power. At an average 3% a year inflation rate, a dollar's worth of initial buying power is worth only 54.38 cents after 20 years. With as much debt as many, and not least the federal government, are carrying these days, inflation could well be higher than 3% in subsequent years. Once again, if not careful about offsetting the incursions of inflation, a retiree could be sharing the dog's or cat's food in a couple decades.

Yet, still, twenty times one's current disposable income can be a LOT of money. Why not panic!? Here are a few reasons:

  • By starting in one's younger years, the power of compounding can be relied upon to enhance one's investments. If one had to save $600,000 by setting aside $30,000 a year, with no return on the money, it would take twenty years, and how many have $30,000 a year to set aside for a generation!? Yet if one's investments go up on average at a 10% annual rate, the time required falls to just eleven years, and if one has that original twenty years to achieve the $600,000 target in tax-deferred accounts at 10% a year return, one would most of the time only have to set aside $9550 year.

  • Often a person will have a spouse helping with the savings and investing. Since two really can live cheaper than one, the amount the two of you may average per year toward retirement can be greater.

  • One or both partners living in retirement may choose to work temporarily or part-time either because they are doing what they love or to supplement retirement income. This can of course make a big difference in how much one needs set aside in investments.

  • There could also be inheritance amounts or other gifts that might bolster the net nest egg and/or reduce one's needs to live off investment income.

  • In addition, other measures might come in handy. For instance, by moving from a larger urban setting to a pleasant but more rural small town one 20-30 miles away, one can often economize on expenses without significantly lowering one's living standards. One may also find that the house one needed for a growing family is now a little too large, that one actually only needs one half or two-thirds as large. By selling the first and buying the second at a discount for cash or by getting a fixer-upper and using some of one's extra time in retirement on "homework," one could add to his or her liquid nest egg.

All in all, even with the metaphorically rough seas volatility in financial markets seen of late, for a majority finding the means to a comfortable retirement are neither very complicated nor particularly daunting. Yet they usually do require a plan and a realistic assessment of both one's needs and of the means to assure they will be met.

Primary source:
How Much You'll Need to Retire.
Brent Arends, "The Wall Street Journal," in MSN Money; January 26, 2012.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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