Good retirement plans account for income, expenses

QUESTION: How much will I need to retire?

ANSWER: This answer varies from person to person, but on a very basic level, it boils down to the difference between income and expenses in retirement.

Take, for example, someone who expects to spend $50,000 each year during retirement. Let’s say, too, that he or she will annually receive $20,000 from Social Security and another $20,000 from pension income. This leaves the person with a shortage of $10,000 per year which will need to be covered by retirement assets and savings

Generally speaking, you can draw down your assets by 3 to 5 percent a year without cutting into principal.

So, for the above example, the retiree would need $200,000 to $300,000 to make up the $10,000 annual shortfall.

It’s important to note that this simple calculation doesn’t take into account the many uncertainties that can affect the course of one’s retirement. Factors including longevity and unforeseen expenses can have a significant impact.

Q: I’m approaching retirement (or just retired). Should I put everything into bonds? How can I ensure that my “nest egg” will provide income to me for the rest of my life?

A: The traditional advice for retirees was to put everything into bonds. The current reality is that people are now living longer and enjoying more active lifestyles. It is not uncommon for people to be retired for 25 or more years.

Bonds have historically provided steady income and relatively low volatility but are unlikely to substantially outpace inflation over time. Equities are generally considered better investment vehicles for growth.

As such, I have been recommending clients consider investing different portions of their portfolio specific to when the dollars are needed.

For example, we might create a “short-term” portfolio (i.e. zero to five years) of more conservative investments like cash and bonds, a “midterm” portfolio (i.e., six to 15 years) that is more balanced, and a “long-term” portfolio (i.e., 16-plus years) that may have a larger portion invested in equities. This strategy can help diversify their investments and ensure that money is available when it’s needed.

Q: I’m still hearing negative things about investing in the stock market. Should I wait it out a little longer before getting back into investing?

A: The problem with this thinking is that by waiting for things to get “better,” you will have likely missed out on substantial growth. People falsely think that getting out of the market is like hopping off an elevator.

They think they will simply watch it go down without them, and then they will hop back on board when it makes its way back up. The reality is that when most people decide to hop off, the elevator is already on the ground floor.

Every investor should take into account their own tolerance for risk, their investment time frame and their objectives. If you are more comfortable with risk and you have a longer time horizon, a more traditional allocation may be in order. If you are risk averse with a shorter time horizon, then a more conservative portfolio would be more appropriate.

Q: What’s the biggest mistake people are making with regards to retirement planning?

A: Surprisingly, people will often put more planning into a two-week summer vacation than they will for their own retirement.

People don’t know how much they will need or how to make what they have last. They might have children who are finishing college and parents who will likely need some type of care. Mapping out income and expenses and earmarking assets and savings are key.

You must first understand where you are in order to get to where you are going.

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Interviewed by Kristen Consillio, kconsillio@staradvertiser.com