5 Questions Retirees Must Answer

Duh, well, yes. With the dumbing-down of the WSJ under Murdoch, I suppose we should get accustomed to trivial pieces like this, but it does insult one's intelligence. The most important factor in retirement planning is the SWR, or safe withdrawal rate. I assume this is too complicated for the Murdoch-era WSJ folks. Luckily, it is not too complicated for others. I defer to the folks at Bogleheads, but it goes something like this:

(a) Calculate how much you will need in retirement to cover at least the basics;

(b) Add how much you will need to cover "nice stuff" you'd like in retirement;

(c) Immediately disregard (b);

(d) Add up all the assets you can sell, pawn, or tap, disregarding your owner-occupied real estate;

(e) Multiply (d) times .04 (4%);

(f) Add to (e) any pensions, social security, annuities, or other sources of income in retirement;

(g) Multiply (e) plus (f) times [1 minus your effective rate of taxation (state and federal)]; 

(h) If (g) is greater than (a), good. If (g) is greater than (a) plus (b), that's really good.

Welcome to planning for retirement 2.0.

Bozo

 

 

Bozo, that's the best primer I've seen for determining the amount of assets needed to retire. My only quibble is that it assumes a person can achieve a 4% return on their money.

Lou,
My interpretation of Bozo's formula isn't that it assumes a 4% return (on investment). The withdrawal rate is established at 4% (initial value), implying a 25 year payout with any ROI in excess of inflation extending the duration.

To: Lou and Craig

Re: My over-simplified retirement calculator

SWR purists over at Bogleheads might disagree with my calculator. The Trinity Study, for example, assumes various asset allocations tilted toward equities and factors in a yearly increase in the SWR. It all gets very complicated (overly-so if you ask me). I "tilt" to a kinder, gentler, calculation, which can be modified yearly, based on actual ROI. For example, a SWR predicated on an asset allocation of 75% equities/25 % cash/bonds is unrealistic for most retirees (too much risk). And most of the SWR studies I have reviewed are quite vague on the assumed rate-of-return on the "bond/cash" component of the allocation. So, I came up with my own "calculator", which (as Craig suggests) is designed to last longer than 25 years if you "out-perform" or permit a modest inflation-adjusted yearly increase, or a combination of both. Conversely, if your portfolio takes a hosing, you merely apply the age-appropriate SWR percentage to whatever you have at your yearly re-calculation, and tighten your belt accordingly. You can (and should) adjust your SWR percentage as you get older. A person 70 years old might wish to use a SWR of 5%, which (at least theoretically) should provide income to 90 (the same as a person 65 using 4%). A person 75 years old might wish to use 6.67%, and so on. Bottom-line is to give yourself income to 90, and cover anything beyond that with longevity insurance (essentially, a delayed single-payment annuity).

Retirement planning is not as complicated as many would have us believe. You can really do your planning quite adequately with a note pad, a calculator, and a couple of cups of coffee (or a couple of beers, if you're so inclined).

Bozo (happily retired)

I guess I am old fashioned. I like to know that I can live comfortably from the interest income from my portfolio without ever having to spend the principal down. This might be overly cautious, but it has worked for me. So I mistakenly assumed you meant a 4% return on your money.