If you are using a qualified Defined Contribution plan for retirement and retirement income is your goal, let’s review a few steps to determine your portfolio balance at the date of your retirement. Also remember that if you are concerned about the uncertainty of your retirement income, your focus should be based on a retirement income payout. Start your calculations by making an estimate of your percentage of preretirement annual income, that you want to receive in retirement. For example using 70% as a payout percentage, is not at all unreasonable; however the percentage that you use should support your lifestyle or standard of living. This income amount is adjusted by Social Security as a retirement income resource. This annual dollar amount is stated in today’s dollar value and are changed to its future dollar value for the accumulation period. The next step is to calculate the total dollar amounts needed to satisfy this income shortfall throughout the total retirement period. This is figured by determining the present value of the annual income shortfall over the total retirement period, using an inflation adjusted rate of return. This is your retirement balance at your retirement date.
You may notice that this amount may be a surprise to you. Retirement is not cheap. And consider this, from ages 25 to 65 is 40 years, add another 22 years and you are at 87. That’s a long time to be managing a portfolio. First we suggest that you start investing for retirement early, second if you are healthy we suggest that you set up a non qualified plan and use insurance to partially fund your retirement as additional income security if possible. The reason we like insurance is because it has some of the best features out there for wealth accumulation and tax planning. It is an tax efficient product. However, we suggest that you discuss the insurance option with your agent to avoid any conflicts with your insurance planning.
There are other strategies that are going to be used more frequently in the future, such as home equity conversion plans, retirement relocation and changes in housing arrangements. But talk to your advisors for help in these areas.
Next up: Portfolios. See the investing link.