YOUR BUSINESS AUTHORITY
Springfield, MO
by Clark Davis
(This is the third in a series based on our most frequently requested presentation, PRIMED For Success: Rational Investing In Irrational Markets.)
In my previous column we discussed the method for estimating your retirement expenses; now let's look at your retirement income to determine whether there will be sufficient cash flow to cover those expenses.
Total your projected income from all sources (pension, Social Security, savings, investments, rental property, IRA, IRA rollover, etc.) In order to do this you will have to make several assumptions.
You will need to project additions you will be making to savings and investment accounts and their rates of growth. Be conservative. For example, historic rates of stock market total returns (income plus growth) have been in the 8 percent to 10 percent range not the 25 percent plus of the last three years.
You will also need to estimate the rate of growth in your salary, as contributions to pension, profit-sharing, and 401(k) plans will be affected. Projected salary will also impact your Social Security calculations.
(We encourage you to annually obtain a statement of your Social Security account. This is especially important to do prior to Dec. 31, 1999, unless you are confident that the federal government will be able to handle the Y2K problem by then. If you need a form for obtaining that information, send us a stamped, self-addressed envelope marked SS in the lower left-hand corner.)
You are now at the moment of truth. Subtracting your expenses from your income gives you either a positive or negative number. If the number is positive, congratulations! You have done two things most individuals do not do.
You have gone further with your retirement planning than the majority and you have reached a goal very few reach enough income to retire. If your projected retirement income exceeds your projected retirement expenses by more than 20 percent you fall in the top 3 percent in the country and are to be commended.
Is this a simple approach? Does it take a fair amount of time to compile the information? The answer to both questions is yes. Is this why most people do not know how they are progressing toward a financially sound retirement?
I don't know. I do know from conversations with numerous CPAs in the Springfield area that the individuals most often seeking their assistance in retirement planning are in their 50s. Why not start earlier in life and spend perhaps no more than an hour or two a year to check whether you are on track to reach that goal?
(Time again for the vacation analogy. Know anyone who would take a two-day trip to a new destination without checking the road map periodically?)
You may be thinking, "Hold on! This is all well and good for someone who has a lot of money and has come up with a positive figure, but that's not me. I came up with a negative number."
Welcome to the club with the highest membership! But don't despair. We just have to see what can be done to get you to positive figures. Using the formula, Retirement Success = Principal x Investment rate x Years, we can determine what we need to do.
We could tinker with the salary figure, but if you were realistic with your initial calculations this would be "smoke and mirrors." Higher investment returns may be possible, but again, we caution against using other than historic rates.
Can you increase the amount you save or invest? Will it be necessary to cut your retirement expenses and lower your expectations? Are you willing to spend your principal as well as your income to maintain your standard of living? Do you need more time to make this work and perhaps need to consider a later retirement date (ugh!)?
Next column: Examining the choices, defining the realities, and making a commitment to achievement.
(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via Springfield Business Journal, 313 Park Central West, 65806 or by e-mail at clark@slia.com.)
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