Spotlight: Bud Hebeler
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If a couple wanted to generate an income of $50,000 a year during retirement in addition to their Social Security income, and they expect to live 25 years after retirement, how much money do they need to save up?

Savings myths and realities

• Percentage you must save. • Saving more if you're behind. • Achieving $50,000 income. • What about inflation? • Social Security shortcomings. • Is 4 percent withdrawal safe? • Changing the investment mix. • Pensions not enough. • When to take Social Security.

There is no perfect answer to this question. The answer depends on your investment allocations, investment costs, future inflation, future market performance and future tax rates. But let's assume that you are already close to retirement. If you are not, you'll need to increase amounts to account for inflation until you retire.

For example, if the answer is $1 million in today's dollar values, then in 10 years you would need 1.34 times as much with 3 percent inflation per year or 1.48 times as much for 4 percent inflation. In 20 years, and until retirement, you would need 1.89 times as much at 3 percent or 2.19 times as much at 4 percent.

If you have a retirement allocation of 40 percent stocks, 50 percent bonds and 10 percent money markets along with investment costs of 1.5 percent (very common), and if future inflation will be 4 percent, you would need $1.12 million savings at retirement. You can reduce the amount you need by using index funds with costs of only 0.2 percent. Then you need $950,000, or about 15 percent less.

You also might need less with a higher allocation of stocks, but you incur significantly more risk, especially if you have a couple of bad years of stock returns earlier in retirement. That's what happened to those who retired in 1965, like my father, or those who retired near 2000, like a number of my younger friends. Unlike the poor performance following a 1965 retirement, 1948 was one of the very best years to have retired.

Those who retired in 1965 would have used up the entire $950,000 in 25 years if they had spent only $15,000 a year, not $50,000. On the other hand, they could have spent $108,000 if they had retired in 1948. This difference is staggering. All of this with only 40 percent stock allocation. Also those who retired in 1965 had higher taxes than those who retired in 1948, thus delivering another crippling blow.

How much attention should we pay to inflation as we save for retirement?

It is important to understand that inflation plays a very large part in these results. Virtually all retirement planners assume that expenses will go up every year with inflation.