How Do You Know Your Retirement Nest Egg Is Enough?
By Pam Krueger, partner, Money Insights and co-anchor's a live half hour daily financial program on www.techTV.com. Money Insights would love to discuss how they can help solve your participant educational needs.
Saving enough money so you can retire in style is only half the equation. Once you've accumulated a nest egg, you'll need to figure out how to make it last.
Millions of people who are near retirement have accumulated a sizable nest egg in various retirement accounts. But even if your savings is worth seven figures, how do you know it's enough?
Take stock
The first thing to do is add up all your sources for retirement income. Include all of your investments, IRAs, taxable, and non-taxable accounts. Then figure out how much Social Security you will receive. You can get a pretty good estimate of your Social Security income by visiting the Social Security Administration.
The right number
For most of us, Social Security won't even cover half of what it will cost to live in retirement. That means the bulk of your retirement income is going to come from your own investments. Financial advisors say you'll need about 80 percent of your current income. I say plan on needing 100 percent if you're thinking about travel and leisure. Financenter has a tool to help you figure out your expenses after you retire.
By the numbers
But how do you know how long your money will last? The Web has some excellent resources. The first stop is SmartMoney's calculator.
Let's say Larry's investments are worth a total of $1.5 million, and let's assume he intends to retire at age 65. He needs to figure he'll live another 25 years, because almost half of us will reach the ripe old age of 90. Now, it's reasonable to assume he can earn seven percent of his investments after taxes by investing conservatively.
The next step is to factor in inflation. If we use an annual inflation rate of three percent, according to the SmartMoney calculator, Larry will be able to withdraw about $91,000 each year for the rest of his life. That's $7,580 per month. Before you join that country club, don't forget we didn't leave any money on the table for your children's inheritance. At that spending rate, the money will completely run out by your 90th birthday.
You can find another free Web-based calculator at Nolo.com. It lets you print out an amortization schedule-- this means you can see how your savings is depleted year by year. However, this calculator does not factor in any inflation rate.
Nolo has another handy spending rate calculator for retirees. This one lets you figure out the interest rate you'd need to earn on your investments in order to receive a certain income each month.
Tapping in
There's a lot more to retirement planning than figuring out how much you can afford to spend. Anyone who's getting close to retirement needs to figure out which investments to tap into first. This gets complicated. For example, if you take money from your tax-deferred retirement accounts (IRAs) either too early or too late, you can be penalized, so I suggest meeting with an accountant.
Financial planners say it makes sense to tap assets in taxable accounts first, so you can allow the tax-deferred money to grow and compound tax-free as long as possible. We are living longer, so it's more important than ever to make your money last as long as possible.
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Pam Krueger is a partner in Money Insight - Money Insights is a financial education and training company that specializes in the production of 401k educational videos aimed at educating without advising. Our 401k videos help people make informed decisions about how to save and invest be clearly illuminating financial concepts in an easy-to-understand style.
