|
By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, May 30, 2004
Most reasons to accumulate a personal nestegg eventually lead to the retirement patch. Consequently, I’m often asked what size of nestegg will suffice to attain a particular retirement.
Someone once said “you spend your whole life believing that you're on the right track, only to discover that you're on the wrong train.”
Don't let that happen to your retirement dreams. There is always something you can do about which train you take to your chosen destination.
Find out if your advisor can estimate your particular nestegg to achieve your comfortable retirement ballpark. I call it the financial independence analysis.
I’ve selected three examples. Each is a couple where the female spouse is two years younger then the male.
Let’s summarize the assumptions:
- The desired goal is a before-tax retirement income of $50,000; $75,000 or $100,000 per year.
- Retirement income is in today’s dollars, for the couple’s lifetime, commencing at selected ages.
- The surviving spouse receives 75% of the desired income amount.
- Inflation is estimated at 3% per year for their lifetimes.
- Return on investment is 6% per year starting at retirement and continuing for their lifetimes.
- 75% of CPP entitlements and full OAS are received.
- 5 years are added to each normal life expectancy for planning purposes.
- The possibilities of inheritances and other windfalls are not considered.
- The calculations do not leave a legacy, except for the principal residence.
A word of caution about the figures that follow. They are ballparks for the particular retirement criteria, not an exact science.
My estimates are generally higher, typically by 5% to 20% than other retirement calculators. Extending life expectancy is one reason.
Accordingly, the estimated sizes of retirement nesteggs are as follows:
Couple’s Current Ages |
Starting Financial Worth (1) |
Retirement Income Desired/Year |
Retirement Nestegg Required (2) |
Implied Return on Investment for Goal (3) |
35/33 |
$100,000 |
$50,000 @ 55 75,000 @ 55 $100,000 @ 55 |
$1,575,000 $2,575,000 $3,600,000 |
10.2%
13.7%
15.9% |
50/48 |
$500,000 |
$50,000 @ 60
$75,000 @ 60
$100,000 @ 60 |
$975,000
$1,700,000
$2,425,000 |
4.7%
11.2%
15.5% |
65/63 |
Achieved |
$50,000 @ 65
$75,000 @ 65
$100,000 @ 65 |
$525,000
$975,000
$1,475,000 |
|
|
(1) & (2) - Excludes principal residence value. Figures rounded.
(3) - With $15,000/year saving capacity until retirement.
Well, it’s true. The devil is in the details. Not to mention, some of these numbers can be downright intimidating.
Of course, the values of financial assets owned, such as employer pensions, are deducted from the indicated nestegg to arrive at the net amount required.
Size aside, the numbers are meant to stir thought and discussion. Direct your emphasis on “what’s important about retirement to you”. That exercise leads to defining your specific needs.
The financial independence analysis becomes part of your investment policy statement, better known as your investment plan. It establishes your personal reference point and shapes the portfolio to achieve your personal return.
Now, your investment plan is current, isn’t it?
|
