For most, the truth about retirement nest eggs are they are never large enough. But how much is enough? Do you know how much is enough for you?
Many years ago I became a Certified Financial Planner practitioner and upon launching forward to do financial plans for clients I was numbed when I stared into the bold number that sprang forth from the page that indicated how much a client needed to have at the time they retired. More often than not, these numbers were red, indicated either a small or sometimes a very large deficit.
Remember the commercial where everyone is carrying around their numbers ranging from the high hundreds of thousands into the low millions and the commercial asked if you knew your number? I like that commercial, because it brings out a very important truth … most people don’t know their number regarding their retirement nest egg. It also screamed at us sitting like a couch potato watching this commercial that not only did we need to get up off the couch and do something productive like all those well dressed successful people on the commercial, but it also brought about a sense of pain knowing that my own financial situation also needed a constant workout if I were going to reach my retirement goals.
Oh yes! I had all the excuses set aside not to do this.
Even though I was a financial planner and my husband, a CPA, had been educated in these issues, it was easy for us to use the same excuses we did to seriously look at retirement way down the road as the excuses we made for not exercising as often as we needed. You know them. Some, if not most of you reading this have used the same excuses.
We have plenty of time to do this.
I’ll start tomorrow.
Today is just not the right time.
I’m too tired right now.
What good will it do now?
However, keeping our retirement goals in front of us and mapping out the correct plan of action is like establishing goals for being fit and healthy. We have to have a realistic goal. We have to know what number we need to reach when either losing weight, or when planning for our retirement.
Once we know that number, then we have to embark upon a plan of action to attain that goal. Both goals require time, attention, discipline and the will power to say no to those things that tempt us to stray from our goals, be it financial or health related.
The most prevalent mistake I see people make when contemplating what amount they will need for retirement is a very simple calculation that almost assuredly dooms the retirement goals of retirees. A client assumes that a certain amount of retirement assets will produce a constant income stream throughout their retirement years. For example let’s assume one has an investment portfolio of $1,000,000, and the client feels comfortable they can achieve a 5% rate of return on that portfolio (This is a hypothetical example used for illustrative purposes only, and does not represent the return of any specific investment.).
Actual rates of return will vary over time, particularly for long-term investments. This provides an annual income of $50,000. Add to that amount, social security and perhaps a pension. Let’s further assume that the annual amount of pension income is $40,000 for a couple, producing a combined income of $90,000.
This might provide a comfortable income in the first year or first few years of retirement, but what happens to this same amount if the portfolio is not invested with a certain percentage allocated for growth?
Allow me to illustrate what inflation alone does to the retirement income of a 65 year old couple. We will assume that at least one of them will live 30 years after retirement and the income need will stay the same throughout the retirement years. I will illustrate this effect in five year increments assuming an inflation rate of 3.5%:
Year 5: $106,891.77
Year 10: $126,953.90
Year 15: $150,781.40
Year 20: $179,081.00
Year 25: $212,692.00
Year 30: $252,611.40
Do the numbers above seem shocking? For most the answer is definitely yes. Just this simple calculation reflects how a couple can start off in retirement feeling pretty good about their financial picture, but inflation begins to erode this hard earned retirement account. Even for someone like myself who has done financial planning for over 20 years now can still be shocked by these numbers depending on the circumstances and desires of the client.
Now, let’s factor in the amount one wants to leave to charity and to heirs. To complicate the calculations further, let’s attempt to guess an average tax rate during that 30 year period of time and now the number get’s even larger, not just shocking, but possibly depressing.
For people who start working with a professional advisor in their younger years, the number usually doesn’t come as a shock or a reason to sink into depression in later years. It becomes a known goal and strategies are put into place to attempt to realistically meet the numerical goal. The number is always a known number and time becomes an ally, not an enemy.
The future costs of not getting this number right is very high. It pays to know this number. Like the commercial asks … what is your number?
Carolyn Philpot can be reached at [email protected]
Required regulatory note: Securities offered by 1st Global Capital Corp. Member FINRA, SIPC. Investment advisory services offered through 1st Global Advisors Inc.