Can You Afford Retirement? Part 2

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In the prior installment, we wrote about determining how much income you’ll need in retirement.

The challenge we face in trying to understand retirement planning is that so many of our resources are in lump sum form. IRA balances, profit-sharing plans, and 401(k)s show one big number, the account value. But in the real world, we need recurring income with which to pay our bills.

So how do you take a lump sum and figure out the recurring income it will produce? Or, if you know the income you will need to fund our retirement lifestyle, how do you figure out the lump sum you need?

(If you would like us to do the arithmetic, or if you are actually getting ready to figure out your own retirement scenario, feel free to call for an appointment in the office or a telephone conference. If you are more the ‘do-it-yourself’ type, read on.)

Our baseline assumption is that a diversified, well-invested portfolio can stand withdrawal rates of 5% annually on a perpetual basis. So if your hypothetical retirement income target says you need $24,000 per year ($2,000 per month) from your portfolio after Social Security benefits and pensions, you can figure the size of the portfolio needed simply by multiplying $24,000 by 20 (or equivalently by dividing $24,000 by 5%.) Either way, this formula says you will need $480,000 in order to produce $24,000 of portfolio income per year.

Some commentators say that 4% is the right number, not 5%. A lower withdrawal rate will produce greater financial security, all other things equal. Our experience says 5% is workable, but this is not guaranteed. It is a rule of thumb. We would expect that the lump sum would go up and down in value with a generally rising long term trend, and that income withdrawals may increase from time to time.

Some people prefer to plan for a certain number of years, or use annuities, to boost planned spending for a given amount of retirement resources. Our preferred methodology, when possible, is to rely on generating sustainable levels of income on a continuous basis.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply.

All examples are hypothetical and are not representative of any specific investment. Your results may vary.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.