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Planning for Retirement – Do the Math

J Terwilliger 2014
James P. Terwilliger, PhD, CFP®
Senior Vice President, Senior Planning Advisor
[email protected]
(585) 419-0670 x50630

So, math wasn’t your favorite subject in school?

It may not have been. But when planning for retirement, you just might want to dust off your textbooks and get out your calculator. Crunching the numbers will put you ahead of the curve when planning for a financially-secure retirement.

Maintaining (or dare I say, enhancing) a pre-retirement standard of living into and through retirement is a goal we all share.

Believe it or not, delaying the start of retirement by one or more years beyond an original target retirement date has a huge multiplier effect on the probability of achieving a desired standard of living. How so? For each year retirement is delayed, we have:

  • one additional year of earned income, a portion of which can be saved through employer retirement plans or outside IRAs, Roth IRAs, and/or investment accounts, resulting in additional wealth accumulation.
  • one additional year of potential earnings and growth associated with that wealth. 
  • reduced by one the number of years that our savings/investments will need to last to see us through retirement.
  • one additional year of earned income that will add to the Social Security wage base which, for most people, will enhance monthly Social Security retirement benefits. 
  • made it easier to delay the start of Social Security benefits, with each year of delay increasing these benefits by 8%.

The math is simple here. The number 1 is very powerful. A modest delay, while perhaps not desirable in the short term, can make a great difference in the long term.
Another mathematical reality related to retirement is lifespan. People are living longer.

At age 65, a male has an average life expectancy of 18 years and a female, 21 years. A 65-year-old man has a 30% chance of living to 90, and a 65-year-old woman has a 40% chance of reaching 90, according to Professor Ron Gebhardtsbauer at Penn State University. A 2011 report by the Census Bureau says that a person at 90 has a further life expectancy of almost five years.

With medical science continuing to advance, these numbers will be conservative in a few years. All of this suggests that when planning for retirement, timeframes ranging from 20-to-30-to-40 years need to be on the radar screen.

The key to making retirement doable, from a financial perspective, is to ensure that distributions from the nest egg over such a timeframe are managed in a way that the money does not run out.

Again, reach for the calculator. We have commented in previous articles about a rule of thumb verified by countless studies in the financial planning literature. While the specifics vary by author, it goes something like this:

For the initial year or two of retirement, limit distributions from all investment resources to no more than about 4%-5% of the total balance. In future years, increase the distribution by inflation to maintain constant purchasing power. For years in which savings/investments suffer an investment loss, forgo the increase in the following year’s distribution. Be sure your overall investments follow a disciplined balanced investment approach – 50%-60% stock-related with broad global diversification and periodic rebalancing. Avoid market timing.

The above then represents cash flow available to the household from your invested resources. Other ongoing income sources may include Social Security, a pension, earned income from part-time work, and distributions from immediate annuities. Outflow is represented by recurring expenses and income taxes.

If projected outflows exceed inflows, something has to give, or you may ultimately run out of money. What might give? We are right back to where we started – possibly delaying the start of retirement or reducing your spending target.

The time to crunch the numbers is before retiring, in the planning stages. It may be too late to effectively reverse course after retiring.

In most cases, learning too late that you jumped into retirement too soon results in having to settle for a less-than-desired retirement standard of living. This is hard to live with for the next 20-30-40 years – and avoidable in most cases simply by planning ahead.

If you are concerned that you will need to do the math on your own, you can breathe easy. Most folks do not want the full burden of retirement planning on their shoulders alone. The consequences of making a mistake are too great. Seek out a fee-based financial planner to help you with the task. Partnering with a trusted advisor is the best way to ensure that you are on the right path.

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.