HOW MUCH CAN I SPEND?
Once the “income gap” has been determined, the next step is to determine if your accumulated or projected assets are adequate to fill this gap. The goal is to determine the amount of annual living expenses that must be covered by your investable assets such as IRAs, savings, and personal investments. When this goal amount is divided by the size of your investable asset portfolio, the result is the rate of return you need to achieve. For example, if a person’s retirement income needs are $40,000 per year and they receive $20,000 in social security benefits, then their income gap is $20,000. $40,000 income needs for year – $20,000 social security benefits = $20,000 income gap Assume they have a total investment portfolio of $500,000 that consists of an IRA, CDs, and savings as well as some personal investments. Their portfolio will need to return 4% per year to match their annual need. $20,000 income gap / $500,000 investment portfolio = 4% annual target rate of return. Can you recall the price of a gallon of milk 20 years ago or a stamp in 1970? For the retiree who has spending needs for 20, 30, or even 40 years, there must be sufficient return to cover the impact of inflation.
If it appears that the goal cannot be met, living expenses may need to be adjusted downward, or retirement should be deferred.
HOW LONG RETIREMENT ASSETS WILL LAST
Number of Years Before Assets Are Gone
% Withdrawn Annually
2 3 4 5 6 7 8 9
40 50 -
-
-
- -
- - -
- - -
The possibility of outliving your assets may be a very real concern. How long your retirement assets will last depends on a number of factors, including the amount you spend, your life span, and the return on your investments. The withdrawal percentages shown refer to a percentage of the initial value of the retirement assets. The table assumes payments are increased 3% annually and are taken at the beginning of each year. Actual earnings would vary from year to year. Source: NPI.
28 33 39 52 -
22 25 28 33 42 -
18 20 22 24 29 36 54 - 15 16 18 19 22 25 31 44 13 14 15 16 18 20 22 27 11 12 13 14 15 16 18 20 10 11 11 12 13 14 15 16 9 10 10 10 11 12 13 14 2% 3% 4% 5% 6% 7% 8% 9% Average Annual Return on Remaining Assets
10
5
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