Post by Zoinkers on Dec 21, 2006 20:00:07 GMT -5
Investor's Business Daily
Sizing Up Your Retirement Nest Egg
Friday December 15, 7:00 pm ET
Donald Jay Korn
During the holidays, you may get away from work by taking some vacation time.
But when will you be able to turn off your clock radio alarm for good? How soon you can retire can depend on how fast you build your nest egg. A year-end review can give you an idea of whether you're on track for meeting your target age for a comfortable retirement.
The checkup involves a little number-crunching. But you can do calculations yourself, using a spreadsheet or even just on a pad of paper.
The starting point is to figure out how much income you want in retirement. You can do fancy modeling at troweprice.com and other such Web sites. Or you can sketch it out yourself.
Factor in how much you expect from Social Security. (See your annual statement from the Social Security Administration. It projects future benefits.) Add pension and other income, if you'll have any.
A shortfall will have to be covered from other assets like your investment portfolio.
Suppose you want to maintain your standard of living by having as much income as you earn before retirement. You might spend less on work-related items such as business suits. But you'll likely spend more on travel, leisure and health care.
Say your neighbor, a hypothetical John Smith, earns $160,000 per year. That's also his target annual income for retirement.
The maximum Social Security benefit for someone kicking back at full retirement age in 2007 is $25,392 per year. Full retirement age is between 65 and 67, depending on your year of birth.
Smith has always paid the maximum Social Security tax. His wife, Mary, who has not worked for many years, will get half as much. Combined, they expect about $38,000 per year from Social Security.
The Smiths also expect to receive $12,000 a year from other sources. That includes a pension, earned income and Smith's fees for being a director of another local corporation.
Filling The Gap
If John and Mary need $160,000 in annual retirement income and they can expect $50,000 from the sources named above, that leaves a gap of $110,000 per year.
"For relatively young, healthy retirees, we recommend starting with a draw of no more than 4%" a year from your assets, said Ray Ferrara, president of ProVise Management Group, a financial planning firm in Clearwater, Fla.
So if you have a $1 million portfolio, you could begin retirement by taking out $40,000 for expenses.
Each year after, the amount withdrawn could rise to keep up with inflation. The annual increase could be, say, 4%. If the nest egg grows at an average annual rate of 6%, the portfolio would last about 33 years, says Sophie Beckmann, an A.G. Edwards financial planner.
That would pay for your expenses from age 65 to 98. If you start with a 5% withdrawal and keep other factors the same, the portfolio will last about 25 years.
An older retiree could afford to start with a higher first-year withdrawal, Ferrara says. With a shorter life expectancy, he wouldn't need his portfolio to last as long.
Here's another way to think of how much money you'd need to keep up 4% or 5%: Turn those numbers around. At 4%, you need to build a portfolio that is 25 times your desired income. At 5%, you need 20 times your desired income.
To illustrate how to choose between 4% and 5%, let's go back to John and Mary Smith, who want $110,000 a year from their portfolio in retirement.
Suppose John aims to retire when he and Mary are 65. They could set a target of $2.75 million in investments -- 25 times $110,000.
If they tap a $2.75 million portfolio for $110,000 in the year John retires, that would be a 4% withdrawal.
Alternatively, suppose John wants to keep working until he is 70. Planning to start drawing down their portfolio then, they could set a smaller target, perhaps as low as $2.2 million: 20 times $110,000.
Tapping a $2.2 million portfolio for $110,000 is a 5% withdrawal. They can do that because when John and Mary are both 70, their joint life expectancy is about 20 years -- 21.8 to be exact. That's about five years shorter than at age 65. So they'll likely need less money.
What circumstances might affect their plans? They could have other assets.
If John and Mary expect to sell a business or investment real estate, for example, they wouldn't need as much in their portfolio.
The same might be true if they have a great deal of home equity. They might downsize in retirement.
The money they pocket after selling their house and reinvesting in a less expensive one could augment their portfolio.
What if you're a long way from having 25 times the necessary income in your portfolio? Or even 20 times? And your other assets won't fill the gap? Also, what about building in a safety cushion to cope with unexpected, long market downturns?
You may have to invest more in the future than in the past. Or you might have to keep working for a few more years, building up your nest egg while driving down the number of years you can expect to live on your own payroll.
Copyright 2006 Investor's Business Daily, Inc.
Sizing Up Your Retirement Nest Egg
Friday December 15, 7:00 pm ET
Donald Jay Korn
During the holidays, you may get away from work by taking some vacation time.
But when will you be able to turn off your clock radio alarm for good? How soon you can retire can depend on how fast you build your nest egg. A year-end review can give you an idea of whether you're on track for meeting your target age for a comfortable retirement.
The checkup involves a little number-crunching. But you can do calculations yourself, using a spreadsheet or even just on a pad of paper.
The starting point is to figure out how much income you want in retirement. You can do fancy modeling at troweprice.com and other such Web sites. Or you can sketch it out yourself.
Factor in how much you expect from Social Security. (See your annual statement from the Social Security Administration. It projects future benefits.) Add pension and other income, if you'll have any.
A shortfall will have to be covered from other assets like your investment portfolio.
Suppose you want to maintain your standard of living by having as much income as you earn before retirement. You might spend less on work-related items such as business suits. But you'll likely spend more on travel, leisure and health care.
Say your neighbor, a hypothetical John Smith, earns $160,000 per year. That's also his target annual income for retirement.
The maximum Social Security benefit for someone kicking back at full retirement age in 2007 is $25,392 per year. Full retirement age is between 65 and 67, depending on your year of birth.
Smith has always paid the maximum Social Security tax. His wife, Mary, who has not worked for many years, will get half as much. Combined, they expect about $38,000 per year from Social Security.
The Smiths also expect to receive $12,000 a year from other sources. That includes a pension, earned income and Smith's fees for being a director of another local corporation.
Filling The Gap
If John and Mary need $160,000 in annual retirement income and they can expect $50,000 from the sources named above, that leaves a gap of $110,000 per year.
"For relatively young, healthy retirees, we recommend starting with a draw of no more than 4%" a year from your assets, said Ray Ferrara, president of ProVise Management Group, a financial planning firm in Clearwater, Fla.
So if you have a $1 million portfolio, you could begin retirement by taking out $40,000 for expenses.
Each year after, the amount withdrawn could rise to keep up with inflation. The annual increase could be, say, 4%. If the nest egg grows at an average annual rate of 6%, the portfolio would last about 33 years, says Sophie Beckmann, an A.G. Edwards financial planner.
That would pay for your expenses from age 65 to 98. If you start with a 5% withdrawal and keep other factors the same, the portfolio will last about 25 years.
An older retiree could afford to start with a higher first-year withdrawal, Ferrara says. With a shorter life expectancy, he wouldn't need his portfolio to last as long.
Here's another way to think of how much money you'd need to keep up 4% or 5%: Turn those numbers around. At 4%, you need to build a portfolio that is 25 times your desired income. At 5%, you need 20 times your desired income.
To illustrate how to choose between 4% and 5%, let's go back to John and Mary Smith, who want $110,000 a year from their portfolio in retirement.
Suppose John aims to retire when he and Mary are 65. They could set a target of $2.75 million in investments -- 25 times $110,000.
If they tap a $2.75 million portfolio for $110,000 in the year John retires, that would be a 4% withdrawal.
Alternatively, suppose John wants to keep working until he is 70. Planning to start drawing down their portfolio then, they could set a smaller target, perhaps as low as $2.2 million: 20 times $110,000.
Tapping a $2.2 million portfolio for $110,000 is a 5% withdrawal. They can do that because when John and Mary are both 70, their joint life expectancy is about 20 years -- 21.8 to be exact. That's about five years shorter than at age 65. So they'll likely need less money.
What circumstances might affect their plans? They could have other assets.
If John and Mary expect to sell a business or investment real estate, for example, they wouldn't need as much in their portfolio.
The same might be true if they have a great deal of home equity. They might downsize in retirement.
The money they pocket after selling their house and reinvesting in a less expensive one could augment their portfolio.
What if you're a long way from having 25 times the necessary income in your portfolio? Or even 20 times? And your other assets won't fill the gap? Also, what about building in a safety cushion to cope with unexpected, long market downturns?
You may have to invest more in the future than in the past. Or you might have to keep working for a few more years, building up your nest egg while driving down the number of years you can expect to live on your own payroll.
Copyright 2006 Investor's Business Daily, Inc.