As baby boomers inch toward retirement, they increasingly want to know what The Number is – meaning how much they need to retire in comfort and security. One of the best minds on this topic, and many other personal finance issues, is advisor Ray Ferrara, head of ProVise Management Group in Clearwater, Fla. His take on this vital subject:
The big questions are: How much money will you need to retire? Are your investments performing well enough to meet your needs? Do your kids’ student loans hurt you? Is your income declining or rising?
A series of recent reports shows how Americans, especially those nearing retirement, face some tough challenges.
Retirement: How Much Will You Need? Is there an easy formula to determine the size of the nest egg you need when you enter retirement? The answer obviously is no, but there are some rules of thumb you can follow.
Let’s assume you want to increase your spending power by a 3% rate of inflation and that your portfolio achieves an annual return of 5%, ignoring any taxes and not illustrative of any specific investment or portfolio. Obviously, none of this is guaranteed.
For every $1,000 per month you want to have for a 20-year period, at the end of which the portfolio is zero, you need a lump sum of $196,000, according to BTN Research. Thus, if you want $10,000 per month, you must have a lump sum of $1.96 million. If you feel like you have really good genes and expect to live 30 years in retirement, then the present value of that stream of money must be $269,000 per $1,000, or $2.69 million for $10,000 per month. If you keep everything the same, but assume a 6% positive return, the lump sum required is $179,000 per $1,000 for a 20-year payout and $237,000 for a 30-year span.
Your Investment Performance? Because of the debacle of 2008 and early 2009, many investors became much more conservative. This is not surprising. On the other hand, some investors now are too conservative, especially those near or in retirement. With today’s low interest rates, after taxes and inflation, those retirees are likely moving backwards in purchasing power.
If we ignore taxes and only look at inflation from 1991 to 2011, there has been a 39% loss of purchasing power, the U.S. Labor Dept. finds. For those living on a fixed-income or whose investment portfolios are too conservative, this causes a reduction in their standard of living.
Student Loan Burden. Among all of the other things retirees need to worry about are student loans. No, we don’t mean personal student loans – we mean the ones they co-signed for their children or grandchildren. According to the New York Federal Reserve, $36 billion of student debt is owed by Americans age 60 and over. While it only represents about 4% of the $914 billion of outstanding student loans, it is enough to cause a delay in retirement plans or make retirement less fun.
Income Declines. The median household income adjusted for inflation is now around $50,000 for a typical American family. This is 8% below the all-time high, set in 2007. Driving these results, as reported by the Census Bureau, was that 80% of Americans saw their household incomes decline, or at a minimum, remain the same, while the top 20% had their incomes increase by 1.6%. Depending upon which side of the political spectrum you are on, an argument could be made for the policies of either President Barack Obama or Gov. Mitt Romney aimed at remedying this situation.
Here’s our take on these results, however: Those who have the skills, and therefore the greatest opportunity for income, enjoyed the increase of 1.6%, and significantly lower unemployment, and those who do not, did not. This speaks not only to the training of the American workforce and its need to be upgraded, but also equally to the importance of increasing the education of America’s children.
For retirement advice and tools, whatever your age or assets visit The Forbes Retirement Guide.
