How to Get to Your Retirement Goals

A question always on many people's minds is "How will I get by financially when I stop working"? One's projected answer can range from "comfortably" to "barely". Some people even conjecture: "Stop working? - who can afford that?"

One of the main goals of our Newsletters is to help our readers navigate toward the "comfortable" end of this continuum rather than facing the future with a overhanging degree of uncertainty.

Although most of us have the goal of a secure and comfortable retirement, many view reaching that goal as something largely controlled by chance.

But, to the contrary, you can greatly increase your chances of achieving a comfortable retirement, or whatever you choose to do in the future, by adhering to the following guidelines (examples with data will follow):

1. No matter how little or how much you make, and no matter what your current expenses are, you must regularly set aside something that you can use to support yourself in the future.

4. For funds that you are truly saving for retirement and not some other contingencies that may develop along the way, you must not tap into this money until you are truly ready to retire.

Example Showing How You Can Build Up Assets Quicker than You Might Think

You can use the example below with whatever figures apply to your specific situation to figure out how to get the amounts of money you will need for your retirement. You may want to refer to Newsletter 4 to see how to estimate how long it takes an investment to double in value for various rates of return.

Suppose you are beginning to get a little worried that your retirement years will not be as financially secure as you would like. How to proceed?

• Are you setting aside enough each year until your projected retirement date, a nest egg which will hopefully grow during your pre-retirement years?

  Regardless of your current age, suppose you want to retire comfortably in 15 years with an annual income of $60,000.

  Everyone's estimate will obviously reflect their own personal considerations. Yours could be significantly more or less than in this example.

  Don't forget to factor in inflation: In 15 years, 60,000 will buy what approximately 40,000 does today assuming an inflation rate of 2.5% per year on average. Also remember that even if you retire with an income of 60,000 in 2016, you will need to have 61,500 in 2017 (2.5% more), 63,037 in 2018, etc. to keep up with inflation.

  You will probably have other sources of income aside from your own yearly savings. Let's make the assumption you will be eligible for Social Security at the time you plan to retire. In 2016, taking into account what today's figures are and adding in cost of living increases, the maximum Social Security yearly benefit may be somewhere around 27,000 although the average benefit will be closer to around 15,000. And, you may have other potential sources of income in addition, such as the equity built up in your own home, pensions, inheritances, etc.

  Let's assume that you can count on 17,000 per year from Social Security and another 10,000 a year from other non-savings sources. This means that you will need to generate another 33,000 per year through your own savings to reach 60,000.

  For every 10,000 per year you wish to generate from savings at retirement, without tapping your principal, you must accumulate 100,000, assuming a 10% rate of return in the year it is withdrawn. Therefore, in order to generate an additional income of 33,000, you must have a total cash nest egg of 330,000.

  Suppose you examine your current nest egg and it comes to 50,000. This means that by 2016, you will need to have to increase that by 280,000 by the time you are ready to retire! Impossible? Not at all. Here's how.

  If you can earn an average of 11% per year on your savings, the 50,000 will double approximately every 6.5 years even without adding anything more to it yourself. So:

  -after 6.5 yrs., you will have 100,000
  -after 13 yrs, you will have 200,000
  -and after 15 yrs, you will have approximately 250,000

  Impressive, but this means that you will still need to come up with an additional 80,000.

  By saving an additional 2,400 a year (or 200/mo.) each year over your next 15 pre-retirement years, you will have put away 36,000. But assuming an average 11% return, the 36K will become approximately 83,000 by the time you stop working. This will allow you to reach a total nest egg of 333,000, and a result, an income of $33,000/yr. in addition to your Social Security and other sources of income.

  Please note that all these figures are without showing the effect of taxes. That is, only investments that you can make in tax-deferred accounts or totally tax-free accounts such as a Roth IRA will allow you to build up the above amounts.

  In the years after your retirement begins, you will probably need to gradually tap into your nest egg principle to increase your yearly income to offset inflation. As a result, as you get older, your nest egg will probably dwindle. You should probably plan for your savings to last until at least age 90 or 95. Of course, your Social Security benefits will last as long as you live and they are indexed to presumably keep up with inflation.

   

• Shouldn't you always seek out the types of investments that will grow your nest egg the most?

  In the above example, we assumed you were earning an average return of 11% per year on your pre-retirement assets. But in recent years, many people have come to believe that they can earn much higher returns, especially by investing in individual stocks by or choosing highly aggressive mutual funds.

  So, using the above example, if you could earn 15% per yr on your current retirement savings, instead of the 11% shown, your nest egg would grow by more than eight (8) times at the end of 15 yrs. Thus, 50,000 would turn into 400,000 over this period as opposed to the 250,000 we illustrated above.

  But as great as this sounds, the last several years have shown if you gamble on achieving the highest returns possible by selecting exclusively the most aggressive investments, it is also possible that your returns will wind up lower than if you had picked a more diversified portfolio with more consistent returns.

  We feel that it may make sense to invest a chunk of your retirement assets in a small number of individual stocks or highly aggressive stock funds, but probably not the majority of your retirement investments. On the other hand, if you have money that is not targeted for retirement, and in fact, is just "extra" money you wish to try to make grow, then we see nothing wrong with being aggressive to the hilt.

  Tom Madell, PhD