By Bill Griffith Jr
Are you saving enough money for retirement? Do you know how much money you need to accumulate in order to retire? Are you concerned about how you should be saving for retirement? The simplicity of these questions can lead many people to believe that there is a simplistic answer. Unfortunately, nothing can be further from the truth. As you will see in the following five-steps, excerpted from my book Securing a Retirement Income for Life: Strategies for Managing, Protecting and Preserving Your Wealth, the process of building your retirement portfolio is analogous to building a business or professional practice.
How would you build a multimillion dollar business? By planning, setting goals, watching your expenses, educating yourself and by working hard knowing that all your efforts, discipline and your commitment will payoff in the long run. Building a multimillion dollar investment portfolio requires the same discipline and commitment. Building significant wealth is not a get rich quick scheme. The reality of successful investing for retirement is that it is a complicated and time-consuming process. It takes plenty of time and patience to become financially independent with the tenacity to overcome all obstacles. The sooner you start, the sooner you will be prepared to retire. Putting it off just increases the amount of money you will need to save each year. In addition to procrastination, many people accumulate a lot of debt attempting to satisfy their desire for immediate gratification. Spending money on an extravagant lifestyle today can make it exceedingly difficult to set enough money aside for retirement impacting their lifestyle in the future. Decisions about how to manage their company retirement plan, how much to contribute, how to invest their money and what to do with their vested balance after they retire also adds to the confusion causing many people to put off planning. It is important to understand how these obstacles can prevent you from saving for retirement. By planning today, you can create your own vision of your retirement and what you need to do now to make your dreams a reality.
If you are committed to reaching your goal of financial independence, here are the steps used by investment professionals to determine the amount of money needed to provide a retirement income for life.
First, you must be passionate about achieving financial independence. It must be a priority for you. You cannot let diversions or obstacles, like those mentioned previously, prevent you from achieving your goal. The very worst possible thing you can do is to put off planning thinking that you will have plenty of time to save for retirement. A multimillion dollar investment portfolio is not something you can accumulate overnight. As you will see in step four, putting it off for eight years can more than double the amount you would need to invest each year to accumulate the same amount of money.
Second, you must establish your retirement income goal in time and dollar specificity. How much money you need to retire is based on an accurate estimation of your expenditures, now and in the future. What type of lifestyle do you envision in the future? Do you want to maintain or increase your standard of living? What amount of income will allow you to do what you want to do?
Third, determine the amount of money needed to provide enough retirement income for the rest of your life. Many people depend on a fixed income stream during retirement. In an inflationary environment, a fixed income stream will not allow you to maintain a constant standard of living. A more acceptable means is to have your income increase annually with inflation. From your retirement income goal, you can determine the estimated target portfolio needed to provide an inflation-adjusted income stream for the length of your retirement life. For example, to receive an income of $150,000 per year increasing at the rate of 3% each year for thirty-five years, you would need an estimated target portfolio of over $2,620,000 earning an average annual after-tax return of 8%.
Fourth, develop an investment strategy designed to meet your goals. How you manage your retirement funds using a diversified asset allocation strategy is one of the most important factors that will help you accumulate the dollar amount required to achieve your retirement income goal. Once you determine how much you need to accumulate, determine how much you should be saving for retirement. For example, to receive an income of $150,000 per year increasing at the rate of 3% each year for thirty-five years, you would need an estimated target portfolio of over $2,620,000 earning an average annual after-tax return of 8%. A 40 year old planning to retire at the age of 65 would need to invest over $35,800 each year for 25 years to accumulate that amount of money. A 48 year old planning to retire at the same age would need to invest over $77,600 each year for 17 years to accumulate the same amount of money.
Fifth, protect yourself from the potential risk of outliving your money. When people retire, they want their retirement funds to last for the rest of their life. Uncertain knowledge of investment returns, length of life in retirement, and rising expenditures make assumptions about the future less reliable. Longer life expectancies increase the potential risk of outliving your money. An extended market decline soon after retirement could jeopardize the sustainability of withdrawals over the life of the retirement period. Meeting financial obligations through an investment-based approach is only one part of the process. Combining a diversified allocation strategy with a guaranteed income stream increases the probability that your retirement funds will last as long as you do.
One of the best things you can do is to start early and stay committed to becoming financially independent. Meeting with a retirement income specialist to plan your retirement needs and objectives and to discuss ways to protect against longevity and an extended market decline will put you in the best possible position to achieve your goals and dreams.
Copyright © 2006 William E. Griffith, Jr. CFP®
Bill Griffith, Jr., CFP® is the author of Securing a Retirement Income for Life: Strategies for Managing, Protecting and Preserving Your Wealth. He is principal of W.E. Griffith & Associates, a fee-based wealth management firm in Washington, Pennsylvania. He is a retirement income specialist – with expertise in the area of retirement plan distribution strategies, healthcare and long-term care issues. He has practical experience in planning and/or supervising all aspects of a client’s financial planning needs with the goal of protecting and enhancing retirement assets and estates. He is a member of the Financial Planning Association (FPA) and the Pittsburgh Chapter of the FPA. One of his strongest credentials is that he holds the CFP certification. This means that he has met rigorous certification requirements including initial and continuing education, examination and experience standards, and agreed to adhere to a strict code of ethics and practice standards.
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