programs you can use to do your own calculations; alternatively, you can work up the numbers at Websites such as www.financial engines.com. (You can also use the calculators at www.black enterprise.com to determine where you stand.)
Use shortcuts. A few back-of-the-envelope techniques may prove useful if you’d rather not do all that math. They include:
The sum-of-the-years method. Here, you simply multiply the amount you’d like to spend in retirement each year by the number of years you expect to be retired. Say you’ll need $35,000 per year from your investment portfolio, as described earlier. If you retire at age 60 and expect to live until age 90, that’s an expected retirement of 30 years. Multiply 30 [years] by $35,000 and you’ll get an investment target of just over $1 million.
If you want to maintain your lifestyle in retirement, your spending will have to increase each year to keep pace with inflation. Even at a modest 3% inflation rate, you’ll need to spend almost $85,000, in 2030, to buy what $35,000 purchases today.
However, your investment portfolio will be earning money, too, providing an offset to inflation. Thus, this method can serve as a rough rule of thumb for setting a target for the size of your nest egg.
The 5% solution. Some advisors urge investors to plan on tapping their retirement fund with a 5% withdrawal in the first year of retirement. With a $1 million portfolio, for example, you’d start retirement with a $50,000 withdrawal. Then, you can increase that amount each year to keep pace with inflation. If inflation is 3%, you’d withdraw $51,500 in Year 2, and so on. Based on the results from financial markets in recent decades, this technique makes it probable that you won’t run out of money over a 30-year retirement.
The “700% Solution.” Certified financial planner Richard E. Vodra of Legacy Advisors in McLean, Virginia, likes this idea so much that he trademarked it. “Generally, people have to work toward saving an amount equal to seven times their income for retirement,” he says. “Some of the techniques used for retirement rely too much on projections far into the future. Who knows what will happen in the next 30 years? Who even knows what currency we’ll be using? Who would have thought, 30 years ago, that the Germans and French would be using something called the euro?”
Instead of making uncertain projections, Vodra advocates his “700% Solution,” which he has found works for most clients.
The Retirement Palette. Another financial planner who has come up with an innovative approach to retirement planning is Mike Martin of Financial Advantage in Columbia, Maryland. “I have found that most people, even those who are well educated, are not comfortable with all the calculations financial advisors use in retirement planning,” he says. “When I talk to clients about the historic variability of market returns, I get blank stares.”
On the other hand, people tend to absorb information if it’s presented visually. Therefore, Martin created what he calls “The Retirement Palette” to help people