Q: My wife and I have asked our financial adviser how much money we can expect to have monthly at retirement from our savings, and have not received even a clue from him. Instead, he asks us what we'll need or want. That's hard for us to answer. The only conclusion I reach is that it's easier for him to figure out how to come up with the total we tell him than to figure out what we can get from what we have. Any thoughts?
A: Considering retirement planning is based on individual circumstances and not rules of thumb, your adviser actually asks a very good question.
If your needs are modest, you may be able to invest more conservatively, take fewer risks and still achieve your goals.
Having a clear goal, including the rate of return you need to achieve, is the first step toward a successful retirement investment strategy. Sadly, I've met many retirees who've jeopardized their standard of living by taking unnecessary risks.
Figuring out what how much money you'll need should not be that difficult. The best way to start is to keep track of current expenses.
Next, factor in inflation (as a rule of thumb, expect to spend about 3 percent more each year to maintain the same standard of living). Then add enough for "non-recurring" or special items, such as replacing the car in a few years or taking the children on a family vacation. Make sure you also have a cushion for unexpected expenses, such as medical or repair bills.
As to how much income you can reasonably generate from your savings, assuming a 30-year retirement and a balanced investment approach, I sought the opinion of Harold Evensky, a respected certified financial planner in Coral Gables, Fla.
Evensky's firm has long preached a "five-year mantra" to avoid having to sell investments during market downturns. (Basically, don't invest unless you can hold your investments at least five years.) In addition, as part of a retiree's overall portfolio, he recommends keeping two years' worth of living expenses in short-term money market and fixed-income instruments. The purpose is to avoid disturbing other investments during extended downturns.
This strategy "is working far better than any other alternative I am aware of" during recent market tumbles, Evensky said. With these safeguards in place and as a "very general rule," Evensky agrees with common research that suggests you can spend 4 percent of your retirement savings the first year in retirement, increasing the amount by 3 percent a year for inflation and maintaining an overall portfolio split 60-40 between stocks and fixed-income investments.
So, for every $100,000 you have saved, you can spend $4,000 the first year in retirement.
If you are willing to reduce withdrawals in later years, you may start by withdrawing 5 percent the first year, Evensky said. Of course, you need to factor in taxes and inflation (withdrawals from fully deductible IRAs would all be taxable, so you don't get to spend all the money on yourself).
As to how long the money needs to last, "from a financial perspective, the risk is not dying too soon but living 'too long,'" Evensky said. As a "minimum standard," he said, his firm assumes that clients will live as long as 70 percent of people their gender and age do.
For a 61-year-old non-smoking man, that would be until age 90, and for his 59-year-old non-smoking wife, until 93, for example. For those with long-living parents and grandparents, it would be longer.