The Anna Maria Island Sun Newspaper

Vol. 15 No. 35 - July 1, 2015

BUSINESS

Anna Maria Island Sun News Story

Part I: How much is enough?

Investment Corner

The primary goal of saving and investing during our working years is to accumulate a sum of dollars which can be bridged into an income stream in our retirement years. Of course, there are other goals that vary by family, such as leaving a legacy gift to our children or favorite charity in the form of an inheritance. But at its core, our investment nest egg has to take care of us during our non-working years.

So how much is enough? This is a wide open question for which the correct answer is very personal. Many focus on a goal, such as accumulating $1 million because they see that as being wealthy. The problem is that what is wealthy for one person is not wealthy for another. It all comes down to their standard of living and how much they need in retirement to live life in the way they desire. Statistics show that the majority of retirees have way less than $1 million in assets when they retire, but let’s use that figure for purposes of an example in this discussion.

Studies show that for newly retired couples, typically in their mid-60s or early 70s, that to maintain their lifestyle takes about 70 – 80 percent of their pre-retirement income. How can we maintain our lifestyle on only a portion of the pre-retirement income? It is possible because certain costs go away in retirement.

The foremost of these is the expense of saving for retirement. That portion of our earnings that we saved during our working years is no longer a drain on household cash flow. Other expenses that are reduced in retirement are healthcare (due to going on Medicare) and income taxes (due to earning less money). In addition, in most cases, children are grown and on their own by this time in our lives, so that expense is also removed.

There also is a fixed or guaranteed part of retirement income that becomes available for retirees. For some this is a monthly pension benefit from an employer where you worked for many years. These are normal for public employees like teachers, military, police and firefighters and other government employees. Some for-profit corporations offer defined benefit pension plans, although these are becoming less common as companies convert to defined contribution plans where employees contribute to the plan each pay period, and in most cases the employer provides a matching contribution.

And for most, Social Security benefits also will provide a guaranteed source of income in retirement. For higher wage earners retiring today, Social Security benefits can be in the neighborhood of $30,000 per person annually (as much as $60,000 per couple where both were high wage earners). Of course, to get the higher benefits from Social Security means waiting until full retirement age or beyond to maximize this guaranteed and inflation adjusted source of income.

The calculation is to plan for the amount of income you desire in retirement, subtract the guaranteed portion you will receive from pensions and Social Security; the resulting difference is the amount of income you will need to generate from your investment nest-egg. In a simple example, if you desire $80,000 of retirement income (80 percent of your $100,000 of pre-retirement income), and your Social Security income will be $40,000, the remaining $40,000 needs to come from your investment plan. The big question -– how much do you need in your investment plan to generate $40,000 a year of income, inflation adjusted, to last from your 60s or early 70s through what will hopefully be a 20- to 30-year retirement?

We will continue a review of the retirement income planning process in my next article here in the Sun in two weeks.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.

 


AMISUN ~ The Island's Award-Winning Newspaper