What Happened to Cash-King?

Evaluating Your Retirement Needs

By Phil Weiss (pweiss@homemail.com)

Towaco, NJ (Jan. 5, 1999) -- The start of a new year is often a time to contemplate your future and how you are progressing towards achieving whatever goals you may have in terms of saving to meet your retirement needs. Tonight I'm going to visit the subject of how much accumulated wealth one may need to reach those goals.

This is not really a simple question, and I don't believe that there is a boilerplate answer to it especially for those that are at least 10 or more years from retirement. The reason that I say this is because it's hard to predict how much money you'll need to meet your living expenses and other necessities that far off into the future. You also have to factor in having money put aside to allow you to enjoy both your pre and post-retirement years. Plus, it's difficult to estimate what your spending patterns will be over such a long time period as well -- particularly if you haven't started raising a family yet or have only recently started to do so.

Even though there are a number of software packages that will help you with these calculations (personally I use Quicken Financial Planner), this is still not a simple task. Using the software requires you to make a lot of assumptions related to future events that I'm pretty sure most of us can't determine with any real certainty. For example, the program I use asks you to estimate the inflation rate, the annual increase in your wages, the change in value of your home, and the type of return you'll earn on your investments.

I can estimate each of these values based upon historical norms, but there really is no certainty that the next 20 to 30 years will turn out the way that I expect. It's also difficult to guesstimate how much we will need to live on once we are no longer working on a full-time basis. I ran the program and was generally happy with the result, but that doesn't mean that I was left feeling all warm and fuzzy about the program's output.

So, if you're like me and don't feel all that certain about what the program tells you, what should you do?

I think that you can take a more practical approach to the process. More than anything else it involves having some discipline and fiscal responsibility. Here are what I see as the keys to meeting your retirement goals:

  1. Start as young as you can.

  2. Avoid spending what you don't have, so that you don't run up large credit card debt.

  3. Invest the maximum amount that you can in pre-tax investments such as 401(k) or Keogh plans.

  4. Take advantage of special accounts like Roth IRAs for you and Education IRAs for your children.

  5. Invest in high-quality stocks using a long-term buy-and-hold approach such as the one we use here in the Rule Maker Portfolio.

It can't ever be over-stressed how important it is to start saving for the future as soon as you can. Here's a quick example of the power of compounding. Say that Joshua invests $2,500 for each of the next 10 years earning an average of 10% per year and doesn't save another dollar for the next 20 years after that. Joshua will invest $25,000 over the first 10 years and will have an account worth nearly $295,000 at the end of 30 years.

Now, say that Fred waits 10 years to start investing. He then invests $5,000 for each of the next 20 years and also earns an average annual return of 10%. At the end of 30 years he will have invested $100,000 and have a portfolio worth approximately $315,000. Even though Fred will have invested $75,000 more than Joshua, his account will only be worth $20,000 more than Joshua's. That's simply because Joshua started investing sooner.

As for credit card debts, they really are dangerous to your financial health. The interest expense that is paid on such cards is not tax deductible, so carrying large balances on a card with an 18% interest rate can easily cost you over 25% on a pre-tax basis.

The big advantage of tax deferred accounts like 401(k)s is that the money that goes into these accounts goes in tax-free. Plus, in many cases your employer will provide some sort of matching funds for your contributions. Both the employer match and your contribution are contributed on a pre-tax basis and grow on a pre-tax basis as well. If you ask me, that's just about the best deal you can find in the investing world. After all, how can you top the combination of excluding your 401(k) contributions from taxable income and having someone add money to your account on a tax-free basis as well?

Okay, so we know that we should Foolishly put away money for retirement and start as soon as we can, but it hasn't been established how much. I look at it this way: If you start young and save 10-20% of your gross in addition to any pension that you may have from your company, I can't imagine many situations that your accumulated wealth at a given age would be unsatisfactory. This has been my approach so far, and I believe it is working well.

Of course, this doesn't mean that you shouldn't check in on your progress every so often, which is relatively easy to do if you track things with Quicken or Microsoft Money. When you check out how you're doing, you should look at the returns you've experienced so far and the impact of any unexpected events and any changes to your assumptions about both your present and your future spending habits. If your portfolio hasn't grown the way that you expected, then you may have to turn up the throttle on the pace of your savings. If your results are above your expectations, then you can think about taking things a little more slowly along the way. The key here is to maintain your flexibility so that you don't unnecessarily pass up opportunities that come up along the way.

Remember the keys are to start early, avoid carrying balances on your credit cards, make sure to take advantage of pre-tax retirement accounts like 401(k)s and Keogh plans, and develop an investment style that focuses on buying stocks with a long-term perspective.

If you want to continue this discussion or have any questions, you can share your thoughts on either our Rule Maker Strategies Board or the Retirement Investing Board.

Have a Foolish evening,


01/05/1999 Close

Stock  Change    Bid
AXP   -1 15/16 99.56
CHV   -1 3/16  80.88
CSCO  +1 5/8   96.94
KO    +1 7/16  68.63
GPS   +1 15/16 58.56
EK    +  5/16  71.50
XON   -  11/16 71.94
GM    +3 3/4   74.63
INTC  +2 7/16  123.25
MSFT  +5 1/2   146.50
PFE   +  3/8   123.88
SGP   +  3/16  56.25
TROW  +3 1/4   38.63
                   Day   Month    Year  History
        R-MAKER  +2.06%   2.84%   2.84%  33.84%
        S&P:     +1.36%   1.26%   1.26%  23.73%
        NASDAQ:  +1.96%   2.67%   2.67%  35.10%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    146.50    87.18%
    5/1/98 55.5 Gap Inc.      34.06     58.56    71.94%
   6/23/98   34 Cisco Syst    58.41     96.94    65.96%
    2/3/98   22 Pfizer        82.30    123.88    50.52%
   2/13/98   22 Intel         84.67    123.25    45.56%
   8/21/98   44 Schering-P    47.99     56.25    17.20%
    2/6/98   56 T. Rowe Pr    33.67     38.63    14.71%
   2/27/98   27 Coca-Cola     69.11     68.63    -0.70%
   5/26/98   18 AmExpress    104.07     99.56    -4.33%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko    63.15     71.50    13.23%
   3/12/98   20 Exxon         64.34     71.94    11.82%
   3/12/98   17 General Mo    72.41     74.63     3.07%
   3/12/98   15 Chevron       83.34     80.88    -2.96%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3516.00  $1637.55
    5/1/98 55.5 Gap Inc.    1890.33   3250.22  $1359.89
   6/23/98   34 Cisco Syst  1985.95   3295.88  $1309.93
    2/3/98   22 Pfizer      1810.58   2725.25   $914.67
   2/13/98   22 Intel       1862.83   2711.50   $848.67
   8/21/98   44 Schering-P   2111.7   2475.00   $363.30
    2/6/98   56 T. Rowe Pr  1885.70   2163.00   $277.30
   2/27/98   27 Coca-Cola   1865.89   1852.88   -$13.02
   5/26/98   18 AmExpress   1873.20   1792.13   -$81.08

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko  1262.95   1430.00   $167.05
   3/12/98   20 Exxon       1286.70   1438.75   $152.05
   3/12/98   17 General Mo  1230.89   1268.63    $37.73
   3/12/98   15 Chevron     1250.14   1213.13   -$37.02

                              CASH    $120.62
                             TOTAL  $29252.96

Note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

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