Retirement Planning Strategies

MP Dunleavy at Money Central offers us an insight into women who are playing catch up in the financial game, or as I call it, Jumpin Jack Flash-I Need More Cash!. In the article she is looking at the financial snapshot of Beth, who is dangerously close to 40 and her husband Scott. Currently, their portfolio is $70,000, excluding their house. They plan to “retire” at 70-So far, this scenario is scaring the BEJESUS out of me.

They have included the advice of a financial advisor who feels they are going to make it by saving and working while retired. Here are some of their conclusions:

1. (If you imagine a conservative growth rate of 7%, drawing down only 4% per year means that you don’t touch your principal — leaving that as a cushion for emergencies or as an inheritance for your kids.)

2. Enough money to live on
Let’s say that, starting in two years, after Beth gets her license, their combined income eventually rises to $89,000 a year — which is what they earned jointly before Beth was laid off. The couple can sock away about $10,200 a year that earns 7% annually. By the time Beth turns 70, they will have built up a nest egg of about $700,000.

3. With an additional $30,000 in combined Social Security benefits starting at age 70, that nest egg should last them until they turn 100. Assuming they draw down $70,000 a year to live on ($46,000 in expenses, plus taxes), they’ll only spend about $100,000 of their principal. Does this mean they now only have $600,000 for the battle?

4. The advisor recommends that they roll over some of their money into the Vanguard STAR Fund (VGSTX). Let’s check on the record and I’m going to arbitrarily pick a year that they had begun their distributions-say it was 1999. The fund that year earned 7.1%. The next year it earned 11%.In 2001 it earned 0.5% and in 2002 it lost (9.9%). So, if they are banking on earning 7% and drawing down 4% you can see it gets a little uncomfortable.

This kind of thinking scares me. I think they need to dramatically increase their savings and find ways to generate more cash flow and plan on having a minimum of 3 years of living expenses in a money market account before they retire and plan on earning 7% and drawing down 4%

What do you think-Would you feel comfortable if this financial snapshot was yours??

Steve Mertz
Jumpin Jack Flash-They Need Cash!!

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One Response to “Retirement Planning Strategies”

  1. Personal Finance Blogger says:

    While I agree they should be saving more, they should also be looking to cut their expenses. A 4% withdrawl rate on $700k is only going to bring in $28k per year. They will need to make their spending match that income. Doing so now rather than later will help them save more money in the meantime as well.

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