The Tribune Democrat, Johnstown, PA

Business

December 7, 2013

NICK MASSEY | How to work out the 'math' of retirement

— If you are one of the 78 million baby boomers rolling into retirement in the next 20 years, you might want to sit down and do a little math. Retirement is a lot more complicated than it used to be.

So, before you quit your job and venture into the next stage of your life, stop for a minute to consider a set of numbers that could make the difference between retiring comfortably and well, not so much.

1. What is a reasonable estimate of your cost of living? This should be obvious, but most Americans dramatically underestimate their living expenses.

Be honest and thorough. What do you pay for housing, including property taxes and insurance? What about utilities? And what about medical expenses or insurance premiums not covered by Medicare? What do you spend in a given month on restaurant dining and entertainment, or on the grandkids?

Whatever total figure you come up with, tack on an additional 25 percent. No matter how thorough you are, I promise you will forget something. The total you come up with here is the single most important figure. It’s the dollar amount you’ll need to generate from your portfolio investments and/or pension and from Social Security.

2. How much can you expect to receive from Social Security?

According to the Social Security Administration, 53 percent of married couples and 74 percent of unmarried beneficiaries depend on Social Security for at least half of their income.

3. How much do your other investments need to earn to meet your retirement expenses? Take your expense estimates from above and subtract the after-tax Social Security payout from question two.

Also, subtract any other fixed income streams you expect, such as from a traditional pension or a trust. The amount left over is what you’ll need to generate from your investment portfolio. This number is critical because it will determine what type of returns you need to generate and what type of risk you can take.

Let’s look at an example. Say you need $100,000 per year to maintain your lifestyle in retirement and that Social Security will pay both of you a total of $50,000.

After taxes, that $50,000 becomes around $36,000, meaning you’ll need your portfolio to throw off $64,000 in after-tax income.  On a

$1.5 million portfolio, that amounts to a return of 4.3 percent after tax, or a little less than 6 percent before tax, assuming a 28 percent tax rate.

Don’t have a $1.5 million portfolio? That could be a problem, if these are your numbers. You may need to downsize your retirement goals or postpone retirement for a few more years to build a bigger nest egg. I wouldn’t want to bank on generating a 6 percent return, given that the 10-year Treasury yields less than half that now.

I wouldn’t be comfortable assuming much more than about 4 percent, which in our example here means that we need a larger portfolio or a smaller retirement.

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