Two Retirement QuestionsSubmitted by Larry Frank Sr. on Fri, 08/10/2012 - 3:00pmThe two most common questions working people have about retirement:When can I retire? How much do I need?Most online calculators begin by assuming an income cut for you whenyou retire. Is a pay cut really what you want? How about starting withmaintaining your current standard of living, and then entertaining possiblecuts only if needed later. You can give yourself a pay cut now, by savingmore, which will make reaching retirement easier.In two previous articles (see below), I discussed portfolio withdrawal rates– the money you take out of your retirement kitty to live on. Note in thefigure below that the withdrawal rates go up as you get older. The lateryou choose to retire, the more you may withdraw. And by waiting, youneed less to retire with.Lets look at an example, where you want to maintain today’s standard ofliving into retirement, i.e., no pay cut based on some ratio. How can youdetermine your standard of living number? From your tax return. Withoutgetting too complicated, simply begin with your adjusted gross income(AGI) number. This is your total income, which is what you make minustax deductions, such as retirement plan contributions.Say your AGI is $125,000. You then reduce that by the annual paymentsyou receive from Social Security and pensions and then calculate whatyour portfolio requires to sustain the unfunded need. Assume your SocialSecurity is currently estimated to be $25,000 a year at age 65.Would you like to retire at age 60, 65 or 70? Look at the figure belowusing the upper panel numbers (previously discussed in Withdraw 4% inRetirement?) We’ll use expected values, which are based on projectedlongevity. The concept is the same with the other numbers, except yourretirement goal is consumption (higher draw down rates), or bequest(lower draw down rates), of your retirement funds.
How much do you need to retiree with? Bear with me for some basicmath. At age 60 the expected value is 4.11%. That’s the $100,000 (AGIminus Social Security and pension income) divided by .0411, equals$2,433,090. That is how much you would need to comfortably sustainan unfunded $100,000 standard of living as long as you may live. Tosustain $100,000 at age 65: 4.52% equals $2,212,390. And $100,000 atage 70: 5.29% equals $1,890,360.Note that the sustainable portfolio value goes down with age, andcontinues to do so as you continue to age. This means that it is okay toconsume some principal when you are retired. This method helps youdetermine just how much principal you may use (assuming downmarkets haven’t done so first). This method also shows the value ofwaiting longer before you retire since you need to save less for fewerremaining years.The value of an advisor enters the picture when you refine your AGInumber based on other factors in your life. For example: Medicalinsurance and costs? Other retirement goals that are not currentlyincluded in your standard of living?When can you retire? Answer: When you have saved enough to sustainyour current standard of living. If you save more now, that means threethings: First, you have thus lowered your standard of living (because youare saving, not spending). Second, as a result, you need to save less tosustain less. Third, saving more gets you to your savings target faster.To see how saving more works, let’s say you reduced your standard ofindividual living (SOIL) through saving an additional $10,000 a year. Nowyour unfunded SOIL is $90,000 and for a 65-year-old your target savingsis $1,991,150, not $2,212,390 from above. More importantly, you do nothave to save an additional $221,240 to sustain your comfortableretirement. The choices you make today directly effect when and howyou retire.How do you save up for your target amount you need to retire?Everything you do has an impact on everything else you do when itcomes to the dynamics of retirement. And the uses of draw downconcepts are handier than you may have previously thought. We havenow come full circle in this series of articles to see that ConsistentSavings Tops Returns.
This is the fifth article in a retirement series. The first seriesarticle: Retirement Planning Mistakes. The second series article: MovingYour Retirement Goal Posts? The third series article: Withdraw 4% inRetirement? The fourth series article, Bear Market Retiree Income,discusses the use of the lower panel in the figure above. Other articles forthe not-yet-retired: In What Should the Young Invest? And ConsistentSavings Tops Returns.By the way, your income cut assumption originated from the concept of"income replacement ratio," first done in 1980 and updated periodicallysince then, by looking at regional and national averages. I believe that youfirst seek to replace the income you are currently spending by calculatingthat dollar number directly. (And yes, this is probably a bit less becauseyou arent paying Social Security payroll taxes once you retire – but couldbe a bit more if you have spending plans once retired that you dont havewhile working.) This is instead of applying some percentage ratio thatprobably has little to do with your specific situation.Follow AdviceIQ on Twitter at @adviceiqLarry R Frank Sr., CFP, is a Registered Investment Adviser (California) inRoseville, Calif. He is the author of the book, Wealth Odyssey. He has anMBA with a finance concentration and B.S. cum laude in physics withwhich he views the world of money dynamically. He has peer-reviewedresearch published in the Journal of FinancialPlanning. www.blog.BetterFinancialEducation.com.AdviceIQ delivers quality personal finance articles by both financialadvisors and AdviceIQ editors. It ranks advisors in your area by specialty.For instance, the rankings this week measure the number of clients whoseincome is between $250,000 and $500,000 with that advisor. AdviceIQalso vets ranked advisors so only those with pristine regulatory historiescan participate. AdviceIQ was launched Jan. 9, 2012, by veteranWall Street executives, editors and technologists. Right now, investorsmay see many advisor rankings, although in some areas only a few areranked. Check back often as thousands of advisors are undergoingAdviceIQ screening. New advisors appear in rankings daily.Topic:Retirement PlanningSpendingWithdrawals from 401Ks