Managing Your Practice

Use this quick gauge for retirement planning

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How much money should you save? That depends on how you’ll want to live.


The author reports no financial relationships relevant to this article. Any opinions, statements, or advice in this article are the author’s and do not necessarily reflect those of Mesirow Financial Holdings, Inc., or any of its affiliates and subsidiaries. Mesirow Financial does not provide legal or tax advice.
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If one issue dominates all others in financial planning, it’s retirement. Every client, at some point, asks two timeless questions of me: How much will I need in retirement? And how much do I need to save now to get there?

My answer is always the same: It depends.

The mobile home scenario

Depending on the client, I have proposed that he (or she) could retire today—if he’s willing to inhabit a mobile home and, probably, lose his spouse and custody of the kids. Sometimes clients smile at my proposal, sometimes they don’t.

Still, the mobile-home scenario is a good starting point for discussion because retirement, from a financial perspective, depends almost entirely on spending habits. Tell me how much you will spend in retirement and I can calculate, to some degree, what your portfolio should be and how much you have to save to get there. The trouble is, unless you are close to retirement, you can’t tell me how things will change between now and then.

A wish, and a plan

One of my oldest clients—dating back more than 20 years—was a senior executive with a major corporation until he retired last year. When we were talking about projections, at one point, he said that, in business, a 1-year projection may be accurate but a 5-year game plan is simply wishful thinking. So many things can change.

In personal financial planning, the same is true. If your retirement is years away, you could change jobs and spouse, and have children (or more of them) with varying college costs. Really, the only thing to do is to make some basic assumptions about the future based on your spending today, take into account likely future events, and, then, begin the process.

So, let’s start with the basics and work backward. This quick look at retirement planning focuses on three factors.

The 4% to 6% drawdown

First, how much can you draw off your portfolio without running out of money—or still have a relatively high probability that you will not run out of money? A multitude of studies on this topic have incorporated hundreds of economic and investment permutations (referred to as Monte Carlo simulations).

The clear consensus is that a balanced portfolio of stocks and bonds should yield an income stream of 4% to 6% annually, with a good chance the principal remains intact or grows. Pushing the withdrawal rate past 6% can be done, but you have to be willing to cut back during down markets.

My experience is that the high side of this range has worked well. But these clients have been in the position to cut back on expenses in down years.

Pay off that mortgage?

Second, paying off all debt before you retire is not an investment decision. Arguably, if your investments perform well and your mortgage is a low-interest one, paying it off may not be a good idea.

The reason planners, myself included, recommend paying off the mortgage is to reduce one’s fixed costs in retirement. Having low fixed costs but higher discretionary costs gives you the ability to cut back if necessary. Flexibility of spending can be as important as investment performance.

How much you’ll spend (really)

Third, you’ll need to make a realistic appraisal of your spending habits. My experience tells me that everyone, including me, lies about spending. When I began my practice, I asked clients to submit a detailed budget of their expenses over the past month. But one month did not cover all expenses.

So we tried three months, then a year—and still projections were off! I then tried the same on my own expenses and found that I could never capture all expenses. Or, more often, we considered such expenses as a new muffler for the car or a new roof to be onetime events. Wrong.

My personal and, I think, more accurate, preference is to simply determine how much you saved at the end of the year, subtract that from your income after taxes, and assume you spent the rest. This eliminates hours of trying to figure out where the money went. The only adjustment to this calculation would be to subtract those expenses that are eliminated at retirement—the mortgage and the costs of raising children, I would hope.


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