A Certified Financial Advisor serving investors in greater Pittsburgh, Pennsylvania – Wexford, Cranberry, Marshall, Bradford Woods, Pine, Richland, McCandless, Ross – and beyond since 1997.

Retirement
Sunday, November 08, 2009

How Much Do I Need to Retire?

It is never simple but determining a general idea of how much money you need to retire doesn’t require a thirty page analysis.

The question that I hear more than any other is, “How much do I need to retire?” If I am sitting in front of my computer when posed with that question, I input some numbers into my favorite spreadsheet and generate a comprehensive Retirement Income Projection that accounts for the numerous expected variables that are relevant to the person posing this very important question.  Unfortunately, a spreadsheet and your favorite financial advisor are not always sitting across the table when this question pops into your head.

In situations where a simplified ballpark amount is useful, a person can generally assume that they will need an investment portfolio large enough where the amount removed each year will not exceed 4% of the total portfolio.  Based upon various historical analyses, it has been shown that a person will not likely exhaust their portfolio as long as they do not withdraw more than 4% of their investments each year.  Therefore, if a person has an investment portfolio of $1,000,000, an investor can plan to withdraw $40,000 during the first year of retirement.  The investor can then assess whether this ballpark estimate is sufficient to meet their needs in conjunction with any other potential sources of income such as Social Security, pensions, etc.

The asset amount against which the 4% withdrawal rate is applied includes only those assets which can be liquidated in order to obtain the cash required for withdrawal.  Therefore, the value of your house, jewelry or car should not be included in the value of your investment portfolio.  If you plan to sell any of these assets, you can use their value in the calculation.  For example, if you plan to sell your house and move in with a friend or relative you should include the equity in your house in the calculation.

Every investor should have a comprehensive calculation that considers the variables of your unique situation.  However, the 4% rule is useful when you are not sitting across the table from a financial advisor with a computer and need a quick and easy estimate.

Posted by Ron on 11/08 at 07:21 AM
Retirement

Saturday, October 10, 2009

Maximize Social Security Benefits

Consider collecting Social Security benefits as soon as possible.

Many retirees defer collecting Social Security benefits at the earliest date possible in exchange for collecting a larger amount beginning later in life.  For each year that you delay collecting benefits, you will receive an 8% increase in your benefits.  Based on the opportunity to receive greater benefits, I understand the incentive to delay collection.  However, most people are not aware of a provision that allows a person to return the total amount of benefits collected and begin collecting a larger benefit amount.

Consider the following hypothetical illustration.  Joe retires at age 62 and begins collecting annual Social Security benefits of $12,000 for the next five years.  At the end of five years, Joe has collected a total of $60,000.  The Social Security Administration will allow Joe to return the $60,000 and begin collecting the higher benefit amount as if he had never collected a dime. 

The icing on the cake is that Joe can invest the $12,000 each year.  Assume further that he earns a modest 5% rate of return, or approximately $600 for each $12,000 collected each year, for a total of $3,000 in earnings.  Joe is permitted to keep the $3,000, return the $60,000 collected without interest to the Social Security Administration, and begin collecting the higher annual benefit amount for the rest of his life.

Therefore, consider collecting Social Security at the earliest date possible, park the money collected in a safe place earning a modest interest rate, return the principal collected when you reach full retirement age, pocket the interest earned during the collection phase, and ultimately collect the maximum Social Security Benefit for the rest of your life.

Posted by Ron on 10/10 at 02:06 AM
Retirement

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