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Determine How Long You’ve Got?
Unless you happen to have a soft spot for the kids or your Alma mater, your goal should be to head off to the pearly gates without a dime in your pocket. Hopefully the kids will have the decency to pay for the casket, but if not, you can pre-pay that too. When they say, “you can’t take it with you”, they really mean it, so don’t leave any of it behind. Longevity has a huge impact on how much you need to retire with.
The only problem you might encounter is making a mistake in projecting how long you’re going to walk among the living. We hate to be morbid, but there are a couple of useful ways to make an accurate estimate. Look at your parents and grandparents and see how long they lived. If you’re mom still beats you at bowling on your 65th birthday - you better plan for a forty plus year retirement. But if everyone happens to live to their mid eighties, just average it and tack on five years for good measure. That will tell you how long you need to fund your retirement. If your hobbies include mountain climbing, gator wrestling, or hang gliding, you might want to shorten that up a bit. If you are married, you might have to stretch it out quite a bit if your spouse is much younger than you. For most relatively healthy individuals, living to 90 should be no sweat. So, if you’re retiring at 65, your million dollars will have to last you 25 years.
Pick an Investment Rate
Investment rates are awful, hovering around 3% for “safe” assets. As we discussed in our article on Master Limited Partnerships, higher dividend returns are available at around 7% at another level of risk. These aren’t secure and are subject to declines in equity values, but they have the potential of increasing in value which they have done over the last 5 years. If you create a diversified portfolio today, you should be able to yield about five percent. In all likelihood, rates should go up in the next few years, so even if you’re risk averse, you should be able to get a fixed income of 5 to 6%. Nobody knows your risk tolerance in retirement, but generally speaking, you should be very conservative.