The younger you are, the less likely you are probably concerned about retirement. You are barely keeping your head above water buying a new home, having children, and getting ahead at work. There comes a time when you do start thinking about where you want to live out your golden years.
When that time comes somewhere in middle age (hopefully in time to get a good plan in place), you have to consider many things. Successful investors start by determining their financial objectives. Each of us is different – with different time horizons, tax considerations, risk tolerance, and income needs. rule number one: your portfolio should be tailored to suit your specific goals.
It’s like taking an auto trip. It is important to know your destination and to have a map. It’s the same with investing. What is your destination? Is it retirement, the education of your children, building an estate for subsequent generations? Your investment roadmap should include:
- How much you currently have invested
- How much you intend to add
- Your time horizon based on your age or the age of your children
- What, if any, inheritance you are likely to receive
- Your current overhead
- Savings: CDs or money markets
- Insurance in place to provide for loved ones
- What you need to keep liquid for immediate usage
The more completely these factors are identified, the more likely you are to achieve financial success. Start with how much income you will need if you were to retire in today’s dollars because you don’t want you to try to guess what impact inflation might have down the road. No one can predict the future rate of inflation, but the good news is: you don’t have to. If the rate of inflation is especially high in the future, you are more likely to get significant income raises which will allow you to put more into your retirement plan and social security will be increased. By law, social security has built in COLAs or cost-of-living adjustments. Also, the value of any assets you have is likely to increase and your investment returns will be higher.
For example, in the late 1970’s and early 80’s, when inflation was sky-high in the double digit, some people were able to get 15, 16, 17, 18 even 19 or 20% interest on their bank accounts. Conversely if inflation is particularly low, you will get fewer raises and perhaps lower returns from your portfolio and property, but things won’t cost as much either. In other words, rates of return and incomes tend to adjust automatically to inflation.
Most retire in their mid-sixties. In most cases, the children are grown and hopefully economically independent. The house will be paid or nearly so. Your mortgage may be gone. You might have lower auto expenses in retirement – although you may going on vacation and golfing more.
Doing the Math
Let’s say you need $7,500 per month or $90,000 per year in today’s dollars to be financially secure in a comfortable retirement. In today’s dollars, social security will provide approximately $2,500 per month or $30,000 per year for most people, and more for couples—perhaps 50-60K. This means you will need an additional $60,000 from your portfolio.
Historically in the past, investors have been able to achieve an approximate reliable income of 5% to 6% with safety of principle. Even in this decade when interest rates have been low, there has been a variety of investment choices that have provided a reliable income of about 6%. Therefore, in our example, you would need one million dollars at 6% plus the $30,000 from social security to achieve your goal of a total annual income of $90,000.
If you already have a million dollars or more, you are there. You can retire early or spend more today, or build a larger estate for your spouse or partner, children or charity. If you don’t have a sufficient amount as yet, you will want to consider saving more, retiring later, reducing current overhead, moving to a smaller house, estimating your inheritance, etc. In other words, successful investors begin by doing the math to establish a meaningful plan designed to fulfill objectives.