As I See It

by Joe D. Jones

Published: July 28,2003

Baby Boomers need to be making concrete plans for funding their retirement. But, statistics indicate that we’re not doing a very good job. Ask someone about their financial plan and they’ll make vague references to saving for kid’s college expenses, a second home and, oh yes, the retirement thing. Well, we need to get more specific about the “retirement thing.”

Advances in medical technology have made it possible for most of us to live in retirement for 25 or more years. Our current lifestyle takes a lot more fodder than Social Security is going to provide. Where’s the rest of the money to come from? In short, it’ll have to come from your savings.

Most articles on financial planning deal with how to invest your money. You know, 60% stocks, 40% bonds and all that. Well, the bigger question is how much will you need and how are you going to get it? Perfectly allocating an insufficient amount of investment dollars will result in a lousy retirement.

How much annual cash flow do you need to retire comfortably? That’s a very complex question and deserves a fair amount of attention. A good starting point is the amount you now spend to support yourself. Adjust that amount for known changes, such as paying off the house, boat, etc. Health care may be less expensive once the utopia of Medicare is achieved. Maybe not. Nonetheless, shuffle your personal numbers around to determine how much cash flow you’ll need for the golden years. Subtract the amount you expect to receive from Social Security and the remainder is what you must provide for yourself. Don’t forget to consider income taxes on retirement plan withdrawals and investment earnings.

Now, you have completed step one of a three-step process. Moving on to step two, multiply the annual cash flow that will be required from investments by 20 and you now have the treasure trove you must accumulate to make your dreams come true. Using the factor of 20 assumes you will withdraw 5% of your investment balance per year in retirement. Though somewhat conservative, a 5% annual withdrawal assumption will keep you from outliving your money and maybe even leave a few dollars for your beneficiaries.

Now that you know how much will be required, you are ready for step three: how are you going to get the funds saved? At this point you will need to consult with a financially astute person who can tell you how much you need to add to your investment fund each year in order to have the necessary amount at retirement. Your age today, the earnings you can reasonably anticipate on your savings and the future of the economy all play a role in determining the annual amount that must be accumulated to get the job done.

As far as selecting the right stocks or bonds to buy, you can either do it yourself or hire a financial planner. The well-worn advice to invest in a diversified portfolio of mutual funds is so common as to be a clich

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