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In the last article, I gave an example of Bob and Mary’s estimate of their retirement needs. Remember that this was their needs analysis over and above their social security payments and Bob’s pension.
There are a couple of big factors that affect how much they will need to fund their retirement out of their savings; how long they will live and what will be their real rate of return on their investments. Simply stated, real rate of return is the return you are getting over and above the annual rate of inflation. Bob and Mary’s estimates to these questions give them insight into the expected rate of return they will need from their investments. The higher the return the expect; typically the higher the risk. Remember it was investment risk that started this whole discussion.
How long will I live in retirement? There are a number of studies out there that indicate there is 50/50 chance that at least one spouse will be living into their 90s. Technology is allowing us to live longer so, a prudent financial plan should take you out as far as age 95. In Bob and Mary’s case, they only planned to live to age 92. Alright, close enough. They also estimated that the real rate of return on their investments would be 3 percent in retirement. That means that their rate of return on their investments would be 3 percent over the annual rate of inflation. Again, a prudent assumption by Bob and Mary. Their calculations estimated their total out of pocket retirement expenses, over and above their social security and Bob’s pension, to be $300,000 to fund 25 years of retirement.
If they change their plan to live to age 95, it will increase their total out of pocket retirement needs by over $20,000. The rate of return on their investments also affects how much they will need. If their real rate of return was zero, which means it only matched the annual rate of inflation; their total needs would increase to $476,000. Worse yet, if the annual rate of inflation increased to 9 percent, so that their real rate of return was a negative 3 percent, their total needs would increase to about $647,000! Wow, inflation can really hurt! So, you can see that how long they will live in retirement; the inflation rate and their real rate of return (that being above the rate of inflation) all have a big impact on your retirement needs. Worse yet, if they have one bad year in their investments, their whole plan could blow up.
In the last article, I gave an example of Bob and Mary’s estimate of their retirement needs. Remember that this was their needs analysis over and above their social security payments and Bob’s pension.
There are a couple of big factors that affect how much they will need to fund their retirement out of their savings; how long they will live and what will be their real rate of return on their investments. Simply stated, real rate of return is the return you are getting over and above the annual rate of inflation. Bob and Mary’s estimates to these questions give them insight into the expected rate of return they will need from their investments. The higher the return the expect; typically the higher the risk. Remember it was investment risk that started this whole discussion.
How long will I live in retirement? There are a number of studies out there that indicate there is 50/50 chance that at least one spouse will be living into their 90s. Technology is allowing us to live longer so, a prudent financial plan should take you out as far as age 95. In Bob and Mary’s case, they only planned to live to age 92. Alright, close enough. They also estimated that the real rate of return on their investments would be 3 percent in retirement. That means that their rate of return on their investments would be 3 percent over the annual rate of inflation. Again, a prudent assumption by Bob and Mary. Their calculations estimated their total out of pocket retirement expenses, over and above their social security and Bob’s pension, to be $300,000 to fund 25 years of retirement.
If they change their plan to live to age 95, it will increase their total out of pocket retirement needs by over $20,000. The rate of return on their investments also affects how much they will need. If their real rate of return was zero, which means it only matched the annual rate of inflation; their total needs would increase to $476,000. Worse yet, if the annual rate of inflation increased to 9 percent, so that their real rate of return was a negative 3 percent, their total needs would increase to about $647,000! Wow, inflation can really hurt! So, you can see that how long they will live in retirement; the inflation rate and their real rate of return (that being above the rate of inflation) all have a big impact on your retirement needs. Worse yet, if they have one bad year in their investments, their whole plan could blow up.
Let’s ease up on Bob and Mary and say that they currently have $20,000 combined in their retirement accounts. At 6 percent annual growth, that could grow to about $68,000 in 21 years when they retire. That would reduce their total out of pocket retirement needs to about $232,000 ($300,000 - $68,000 = $232,000). In the next article I’ll discuss how their estimated retirement objective drives their investment decisions.
If you would like to comment or make any suggestions, contact Larry Martin at larrymartin@theretire mentexperts.us or call at 651-4321.
The information provided is from sources believed to be reliable; however we cannot guarantee or represent that it is accurate or complete. Because each individual’s situation varies, the information provided is not intended as tax/legal advice nor is it intended to indicate suitability for any particular investor. Always consult with the appropriately licensed professional regarding the details of your specific situation.
Larry Martin is a registered representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Additional advisory services through Main Street Advisors. OSJ Branch: 1407 Main Street, Hays, KS 67601. The Consultants Financial Services, LLC, Main Street Advisors and IFG are not affiliated entities.
Licensed to sell securities in the following states: Kansas, Missouri, Nebraska, California, Louisiana, Iowa and North Carolina.
