The Clinton Herald, Clinton, Iowa

Lifestyles

October 29, 2013

The numbers you really need to know for retirement

(Continued)

Let’s look at an example. Say you need $100,000 per year to maintain your lifestyle in retirement and that Social Security will pay both of you a total of $50,000. After taxes, that $50,000 becomes around $36,000, meaning you’ll need your portfolio to throw off $64,000 in after-tax income.  On a $1.5 million portfolio, that amounts to a return of 4.3 percent after tax, or a little less than 6 percent before tax, assuming a 28 percent tax rate.

Oh, you don’t have a $1.5 million portfolio? Hmmm, that could be a problem, if these are your numbers. You may need to downsize your retirement goals or postpone retirement for a few more years to build a bigger nest egg.  Personally, I wouldn’t want to bank on generating a 6 percent return, given that the 10-year Treasury yields less than half that now. I wouldn’t be comfortable assuming much more than about 4 percent, which in our example here means that we need a larger portfolio or a smaller retirement.

4. What do you expect the inflation rate to be? Inflation is the single most dangerous figure for would-be retirees because it is the one they never see coming. Inflation creates a nightmare scenario where your expenses rise while your income remains fixed.

This means that your investment portfolio will need to generate enough to make up the difference. If you assume an inflation rate of 3 percent, your $100,000 per year in living expenses will be $103,000 after the first year. That may not sound like much, but remember that inflation is like interest.  It compounds over time. To compensate for this, you need portfolio growth and, more importantly, adequate exposure to income-producing asset classes that have built-in inflation protection.

I used very conservative numbers in this column, and I encourage you to do the same. It’s better to be too conservative and end up with a bigger cushion than expected in retirement than to find yourself strapped for cash.

If this all sounds ominous and serious, it is. Retirement is far too important to leave to chance. If you haven’t done what you need to do, it’s never too late. Start now. If you don’t know what to do, get with a good financial adviser to help you.

Nick Massey is a financial adviser in Edmond, Okla. Reach him at nickmassey.com.

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