George Fisher Advisors LLC

Retirement Planning

Most people now know that they should not count on government help or corporate programs to support them in retirement and the question is what to do about it. The answer, in a word, is PLAN. In a few more words, SAVE and INVEST.

Everyone’s situation is different and careful, detailed analysis is needed. This is particularly true because of the complexity of the rules governing Qualified Plans and tax-deferred accounts, to say nothing of trusts and closely held businesses and so on. To help, I have set up a retirement savings calculator to show how much money you need to support yourself in retirement. The figures won’t be exact, but they will be close.

Click to open the Online Retirement Savings Calculator in a new tab or window. To get started, this is what you need to do

First, enter the number of years from today until you expect to retire. This is the Years to Retirement field and represents the time during which you can save money

Next, enter the number of years you envisage spending in retirement. This is the Years in Retirement field and represents the time you will live off of your investments, at least partially

After this, enter a figure for the Current Portfolio Amount field. This figure equates to the current value of your investment portfolio

Next, enter the rate of inflation; 3% is a good estimate

Then, in the Investment Return field, enter the amount you expect your investments to return every year; on average, pre tax

The final step is to consider how much you will need from your investments every year once you retire. This is the Expected Income Requirement field. Estimate this figure according to your own wants and needs, and don’t forget that later in life you may have very high medical expenses. After this, use the Outside Sources of Income to indicate any additional income you can expect during retirement. Remember to use today’s dollars: the spreadsheet will adjust for inflation.

Given these inputs, the minimum portfolio size can be calculated. This is the amount of money you need in the bank on the day you retire. There are four ways of looking at the amount of money you need.

Option 1: Run the Portfolio Down to Zero. This figure shows how much you will need if you plan to spend all of your money and have none left over when you die. Philosophically, there’s nothing wrong with this approach but if any of your assumptions are just a little bit optimistic, you’ll find yourself with no money before you die, which is not a good plan.

Option 2: Maintain Same Dollar Amount. This figure shows how much you will need if you plan to have the same dollar amount in your portfolio at the end of your retirement as when you start. This is a safer bet than Option 1, but inflation will take a toll.

Option 3: Inflation-Adjusted. This figure shows how much you will need in order to end up with the same amount adjusted for inflation.

Option 4: Withdraw no more than 4%. This figure shows how much you will need (adjusted for inflation) if you plan to withdraw 4% every year. This is the highest hurdle but it is the one you should be shooting for.

Math Favors The Early Saver

The earlier you start saving, and the more consistently you save, the easier it will be to retire comfortably. Consider these scenarios in which three people save $15,500 a year tax free (the current limit to employee contributions to a 401(k)). All three people earn 10% per year on their investments.

Peter saves every year from ages 25 - 65. Total investment: $635,500. Amount at age 65: $7,561,703

Paul saves every year from ages 25 - 35 and then stops saving but lets the investment grow. Total investment: $170,500. Amount at age 65: $5,012,046

Mary waits until age 35 to start saving but saves every year afterward until age 65. Total investment: $480,500. Amount at age 65: $2,820,123

How does Paul, who stopped saving at age 35 to raise a family or something, do better than Mary who started 10 years later but saved for 3 times as long? It’s the power of compound interest ... by age 35, Paul had built up $287,233 and that amount, compounded, was too much of a lead for Mary to catch.

The lesson is obvious: start saving as early as possible, save every year and put away as much as possible. For Mary to retire with as much as Peter, she will have to work another 10 years or else increase the amount she’s saving.

Preparing for retirement is an act of complete self redefinition. Everything is new and everything is hard. And there’s really no one to show the way because ours is the first generation to do this on a large scale. It’s no wonder that financial planning takes a back seat. However, having one’s finances in good order and well understood reduces fear and stress by replacing an amorphous unknown with a concrete known.

Aristotle said that “well started is half done”. The same applies to retirement planning. If you get your financial house in order, you will have a much easier time of dealing with everything else that may be going on in your life; and the earlier the better.