Calculating your retirement
If you retire at age 65, your retirement
could last 30 years or more. And many of you would like to say adieu
to the work-a-day world when you're in your 50s.
Will you have the financial wherewithal to do that?
Of course, that answer is determined by how much money
is available in your retirement plan, Social Security benefits and
any additional personal savings or investments. Will it be enough?
The odds are, you don't know.
But experts say having a realistic estimate of how
much income you'll need during retirement is key to a successful
Think about the future
Only about a third of us take the time to calculate our retirement
needs. The American Savings Education Council says people who calculate
their needs are far more likely to hit the target than those who
just plunk an arbitrary amount into a 401(k).
Unfortunately, too many people guess and shortchange
themselves, according to Bob Barry, president of the Financial Planning
"People have a weird concept of what they're
going to spend money on. People who make $160,000 say they'll need
$40,000 to $50,000 a year when they retire."
In fact, the person making $160,000 a year is likely
to need at least $112,000 per year in retirement. That's right.
For most of us it's best to count on needing 70 percent to 90 percent
of our preretirement income to live comfortably.
The ASEC's annual retirement confidence survey shows
17 percent of workers believe they'll need less than half of their
pre-retirement income, and another 25 percent expect to need no
more than 60 percent.
Perhaps people underestimate their future needs because
they're doing a poor job of saving for retirement and they'd rather
not know how far off the mark they are.
The ASEC says less than 25 percent of those ages 40
to 59 have saved $100,000 or more.
A fair question is just how do you go about assessing
your future income needs? Is it really as simple as determining
70 percent or 90 percent of your current income?
No. There's that pesky inflation factor. What return
will your savings and investments generate? Will there be a long
bear market in your saving years, or your retirement years? Do you
want to travel the world and stay at first-class hotels or would
you be happy renting an RV to visit Mount Rushmore?
And that's just for starters.
If you really want to get a grip on what you'll need
for retirement, talk with an adviser, such as a certified financial planner.
"Your life should control your finances, not
your finances control your life," says Barry.
"Spend time telling us what you'd like your life
to be like in retirement and we'll tell you what you need to fund
it. Be ready to spend a significant amount of time talking about
what you've learned about money, what you're passionate about, what
you want to do.
"If you went to the doctor tomorrow and found
out you have five years to live -- and you'd be in pretty good health
until then -- whatever is incorporated in that answer is what the
financial planner should consider."
Seeing a planner is undoubtedly your best bet, but
given that most of you probably aren't reaching for the phone book
to find one, we'll look at an alternative that's a step in the right
direction (and is free): a retirement calculator, the kind available
on dozens of personal finance Web sites including this one.
"What's critical to a successful retirement
is to get started as soon as possible. The calculations will show
you how big the job is, and it's a really big job," says Stewart
Welch of The Welch Group in Birmingham, Ala.
One problem though is the calculators themselves. Some ask a
lot of questions, others hardly any. Some will say you can retire
at 60, others will have you working until you're 75.
Welch agrees the calculators have limitations, but
says just going through the math is helpful.
"The fact that you can go to three different
calculators and get three fairly significantly different answers
isn't so problematic. It's a good idea to not assume one will give
you the correct answer. What's really important is to go through
the exercise, and it's even more important to repeat the exercise.
"Don't assume you're going to do a calculation
now and find you have to invest $1,000 a month and just do that
for 20 years. Review it on an annual basis. If we got on a plane
for Seattle and set the initial course, we'd end up in the ocean
if we didn't fine tune it along the way."
Michael Everett, professor of economics and finance
at East Tennessee State University, says he's never been comfortable
with any of the calculators he's tried on the Internet.
"I didn't know the assumptions they were using.
Were they real returns, or nominal returns? You hear most stocks
return 12 percent on average, but is it a real or nominal return?
If you had $100 and got 12 percent, at the end of the year you could
buy $12 more goods if it was a real return. But if it was nominal
-- say inflation was 5 percent that year -- you'd only be able to buy
$7 more goods.
"The next question is, what do you think the
inflation rate will be? Well, how do I know?"
Everett would like to see software developers come
up with more powerful and user-friendly calculators that would run
varying portfolios -stocks, bonds, or balanced -- over different
historical periods to see how they perform over good roads and bad
"We could say let's retire you in 1928 and put
all your money in stocks. Actually, you don't do too badly,"
says Everett. "You could do worse if you put all your money
in stocks in 1965. It wasn't as deep but it was more prolonged.
The market started down in 1928 and bottomed in 1933. In the '60s
and '70s, the market started down in '68 and didn't recover until
Everett says it's important to add a historical perspective
when calculating retirement needs because we can't assume that history
"Our markets are extremely overvalued by historical
standards -- much more so than 1929. The market could collapse or
go sideways for 10 years. Look at Japan. We used to think they would
take over the world. In the '80s their market went up threefold,
in the '90s it collapsed threefold."
That type of analysis shows why Everett doesn't like
to apply averages, as in returns, when it comes to individuals.
Averages, says Everett, are fine for pension managers.
"An individual is going to get a return in one
specific period. A lot of advice is based on those averages. Averages
look less risky. You average out the good and the bad so the returns
don't fluctuate so much. But what happens for an individual could
be much better or much worse. In general, an individual's risk is
much greater than the average."
Whether you visit a planner or use an online calculator,
you'll need to have a good idea of how much income you can expect
in your retirement years. Each year, around your birthday, the Social
Security Administration sends you a statement estimating the benefits
you'll be receiving. Click
here for calculators and other retirement planning tips from
the Social Security Administration.
Another site that has several retirement calculators
-- Posted: April 29, 2002