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The Retirement Planning Guide
 


www.How-To-Retire.com - Retirement planning and investing for retirees


The Internet Guide To Planning Your Retirement

 

 

Note that these pages do not constitute financial or legal advice. They can, however, be used to help you prepare for a consultation with a qualified financial advisor or other expert



 

 

Finalizing Your Plan

This means you’ll need $2,052 in the second year,  and so on and so on... Examine the year chart below (split into two images as its width doesn’t fit on most screens in one snapshot):  



Notice the user above cannot even buy new bonds each year, because (s)he immediately needs to withdraw from their nest egg more and more each year to live comfortably.

It is clear that the questionable role of inflation can make safe retirement planning a rather sticky ordeal.  

In the above example, the retiree begins in Jan. of 2004 with $600,000 in bonds paying an average of 5.28% tax free and has $16,000 worth of additional income after taxes. His/her total annual income-in-pocket is computed roughly at $47,200 with inflation costs at $40,000 and non-inflation (mortgage) costs at $10,000.  

Immediately, there is a small deficit which grows each year with inflation as (s) he needs to pull more money out each year to compensate--which, in the case of bonds, is next-to-impossible since bonds are typically sold in $5000 to $10,000 increments and there may be loss incurred for selling early and withdrawing if market interest rates have increased since the date of purchase.  

Plugging your own numbers into a similarly-designed spreadsheet should help you determine precisely how much you’ll need to retire IF inflation averages 3.1% in a way no other plan can.   

The user of the sheet above, for example, can replace the January 2004 “Amount in Bonds” number (which is presently $600,000) with any other trial number and spreadsheet software will automatically calculate the rest of the figures accordingly. As (s)he raises the $600,000 starting number to $700,000...$800,000 etc;-- (s)he will find a point in the spreadsheet where the income will consistently stay above the cost of living-- that point represents the amount (s) he will probably need to retire safely.   

The first time you devise such a spreadsheet, you may be surprised to find that a few years down the road-- you not only need to withdraw from the nest egg--but that you start running into negative numbers--i.e. you run completely out of money.  

You’ve simply found out that you may need more money saved than you thought to retire comfortably--and safely--planning for reasonable inflation.  

Notice that the chart above tells the user how much more they’ll need to re-invest in new bonds each year to keep up -- based on a hoped/expected rate of return of 5.28% with inflation averaging 3.1%. The only time it might be considered “safe” to have to withdraw from the nest egg is if the spreadsheet suggests that those withdrawals aren’t necessary until say, 20 years down the line--and most of the initial bonds purchased have approximate 20 year maturity dates.  

Extra caution would then need to be taken to time bond maturities along with the need for cash.  The younger you plan to be when you retire, the more such an option is available to you. Otherwise, it might best to either a) not invest at all (or leave money in minimal money market-type investment) and withdraw annually from your nest egg if there’s enough to support a comfortable lifestyle and account for inflation or b) plan to save enough such that you can live comfortably off the income from tax-free municipal bonds while having enough left over to re-invest in more bonds each year--enough to stay ahead of inflation.

 

The key to devising your own spreadsheet is as follows:  

Column 1 (Year), Column 2 (Amount Saved), Column 3 (Amount of Income Generated From Savings [[Multiply Column 2 Value by 6% or any reasonable value]]), Column 4 (Miscellaneous Income), Column 5 (Total Income [[Value of Column 3 and 4 added]]), Column 6 (Your Inflationable Costs [[For subsequent rows take this value and increase by 3.1%--being careful to program your spreadsheet to add 3.1% each year to the immediately preceding year]]), Column 7 (Non-Inflationable Costs), Column 8 (New Bonds Needed [To keep up w/ your rate of inflation, add 3.1% to the value present in the  inflationable costs field and multiply the difference between the two numbers by the appropriate figure. If, for example, you’re working with a 5.28% expected annual yield from bonds then the formula would look like this:

(F8*0.031)*18.93  

Because you would need 3.1% of the present inflation need-- and multiply it by 18.93 to find out how large a bond you’d need to purchase such that 5.28% of its value will equal the difference/raise/increase you need in the following year.  

The next column simply adds the result of the previous column to the total amount needed for the year --and Columns 10 and 11 are customized to deal with whether there is any shortage or overage in the amount that needs to be re-invested to fulfill the requirements of the plan.  

Final Remarks

In closing, we leave you with some well-intentioned words from our web site:

[Remember that] the best route to any destination is typically plotted with a map of some sort. Similarly, the surest way to achieve any goal is to follow a carefully conceived plan for doing so. Unfortunately, too many people retire with only a rough idea of how much they'll need, of how much their lifestyles will cost in years to come, and of what sort of "backups" they'll have if one or more elements of their strategy fails.  

Often, these same retirees rely on the loose investment counsel of financial planners without fully understanding their logic. Even if you're not the "driver" behind the wheel of your plan, it certainly helps if you personally know the best roads to take, the directions to follow, and what alternate routes to pursue if traffic becomes unmanageable.  

As you study our guide, ask questions, and pre-plan your retirement before meeting with a planner-- you will be surprised just how much more you have to offer the conversation.  

You might even find that your advisor is “not for you” and be motivated to interview others. Plan carefully....and be thorough.  

We wish you all best wishes in your retirement. Please contact us if you have any questions or you need help in planning.



 

 

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