Retirement Needs, Part 3
Developing a goal

by Ann Coleman (TMF

Reston, VA (July 2, 1999) -- Most of us are either future or current retirees. Oh, you don't think of yourself that way, Stud? Hey, I don't blame you a bit. If it helps, don't think of it as retirement, think of it as "living off your investments." That has a nice ring to it.

Right now we are in an unprecedentedly fantastic market that is making early and/or more comfortable retirement possible for a larger percentage of the popular than ever before. Don't ask me how much longer it will last. I have no idea, but there are good reasons to believe that the current boom is not going away soon. With a little luck (cross your fingers), you can translate today's good times into a far more comfortable retirement than us working stiffs ever expected.

But first I need to make an apology. Tuesday I printed an e-mail from a reader to illustrate how carefully one needs to think about retirement needs. The writer was pointing out that when you are retired you will have more time for activities and for some people, those activities can cost quite a bit. Unthinkingly, he said, "Unless you are crippled you will want to do something with that time." I don't know how I could have let that slip by. It's not the writer's fault -- he was writing to me off the cuff, and not thinking about a wide audience. I am sure his intent was simply to point out that anyone who is able to enjoy life will have more time to spend enjoying it when they are retired. Only one very kind person wrote in to explain my stupidity to me, but I am sure I owe you all an apology for that gaffe.

For the last two days we've been talking about coming up with some kind of reasonable annual income figure (in today's dollars) for your post-retirement spending needs. I've been offering rather general suggestions about that figure because I firmly believe that you are the best person to assess your own needs. Today I am going to give you one simple illustration of how to turn that figure into a goal.

Your goal is the stash you need to accumulate before you can make your break from the 9-to-5 world. I've been saying for two days that much retirement planning advice is too generalized and that you shouldn't rely on rules like your post-retirement income will need to be 70% of your pre-retirement income or you will need X dollars based on a certain life expectancy. Today I will give you a general rule that works pretty well for estimating your goal, and next week we will talk about how to get there.

OK -- you have your post-retirement, gross annual income figure in mind, right? Here's the drill. First, multiply by 20. Now, how many years are there between now you your retirement (pardon me, the year in which you begin to live off your investments)? Got it? OK, get out your calculator and multiply that income*20 figure by 1.02. Multiply the answer by 1.02 and keep multiplying the answer by 1.02 for as many times as you have working years left.

If you have a calculator that will do exponential operations (the Windows calculator will do it in Scientific View using the x^y key), just multiply your annual income figure by 20 then multiply by 1.02^Y where y is the number of years to retirement. Either way works.

That's your inflation-adjusted savings goal. Looks HUGE, doesn't it? You've probably noticed that I am using a low figure for inflation. If you want to up it, you can use 1.03 (for 3% per year) or 1.04 (for 4 per cent per year). The longer you plan to work before retirement, the more likely it is that inflation will average higher than 2% per year. But if you have lots of time for planning, you can also plan to minimize inflation's impact by seeing to it that your housing is paid for by the time you retire and that much of the stuff that we all love to accumulate is already accumulated.

Next Thursday we will talk about how to reach that goal. In the meantime, have a fun Fourth of July and don't worry and fret about that number. One of the nicest things about investments is how they appear to grow slowly at first but snowball once they get going.

Fool on and prosper!

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07/02/99 Close
Stock  Change   Last
CAT  +   3/4   61.94
JPM  +1  5/8   141.88
MMM  +1 11/16  88.88
IP   +1  1/4   51.00
                  Day    Month   Year   History
        FOOL-4   +1.63%   2.01%  28.29%  30.20%
        DJIA     +0.66%   1.54%  22.11%  21.62%
        S&P 500  +0.74%   1.35%  13.76%  14.03%
        NASDAQ   +1.29%   2.06%  25.01%  26.72%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     61.94    43.77%
 12/24/98    9 JP Morgan    105.51    141.88    34.47%
 12/24/98   14 3M            73.57     88.88    20.80%
 12/24/98   22 Int'l Paper   43.55     51.00    17.11%

    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1486.50   $452.50
 12/24/98    9 JP Morgan    949.62   1276.88   $327.26
 12/24/98   14 3M          1030.00   1244.25   $214.25
 12/24/98   22 Int'l Paper  958.12   1122.00   $163.88

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5207.88