Most of my Clients are engineers. As a financial planner with an office in Westlake Village just outside of Los Angeles, I am able to meet with most of my Clients who work in Aerospace & Defense and explain how we calculate the expected costs of their unique retirement needs. Now, I would like to please show you how you can bring the same type engineer’s approach to your own retirement and financial planning.

Utilize the steps through this example to conduct your own basic retirement needs analysis. You will need an Excel spreadsheet.

The main question: “How much money will I need at retirement to fund what I consider to be a comfortable lifestyle, considering inflation?”

The first step is to generate “Assumptions” by answering the following questions:

  • What age will you retire?
  • What percentage of your current income do you feel you will need to cover expenses and maintain a comfortable lifestyle during retirement?
  • What will your Social Security income be when you believe you want to take it?
  • What amount of income, if any, do you expect to earn from annuities, pensions, property rentals, and/or lump-sum payouts? Will income from these sources adjust with inflation?
  • Given risk you are willing to take with your investments, what is the average annual rate of return you expect?

Next, organize your Assumptions:

  • Assume you are age 55 and want to retire by age 65.
  • Assume you earn $150k this year, net of taxes, but you expect to only need 65% of that income each year to maintain a comfortable lifestyle in retirement.
  • Assume you take Social Security at retirement and will earn $25k per year, net of taxes. Note: Social Security will adjust with the cost-of-living.
  • Assume you have no pension or lump-sum payments.
  • Assume you have passive rental income of $20k per year that you expect to consistently generate and keep up with inflation.
  • Assume, given your risk, you expect to generate a 6% average annual rate of return from invested assets.
  • Assume a long-term average rate of inflation is 3%.
  • Assume you want your plan to reflect a lifetime that lasts at least until age 90.

Now you are prepared to answer the main question.

Your goal is to retire in 10 years. Currently, you earn $150k per year after taxes. However, at retirement, you expect to only need 65%, which is a Present Value (“PV”) of $97.5k. You expect to consistently generate annual income with a PV of $30k and $20k for Social Security at age 65 and rental income, respectively. Therefore, you need to generate a PV of $47.5k per year from your investable assets in order to fill the income gap.

Inflate the PV annual need of $47.5k so that it represents the first year of your retirement. In other words, find the Future Value (“FV”).

  • Present Value (PV) = 47,500
  • Payment (PMT) = 0
  • Number (N) = 10
  • Inflation (I) = 3%
  • Future Value (FV) = [Compute] ?
  • Excel Key Strokes:

    • Type =fv(.03,10,0,-47500). Hit ENTER/RETURN.
      • rate = .03
      • nper = 10
      • pmt = 0
      • pv = -47500

    The FV is $63,836.03 which represents the amount of income you will need to earn from your investable assets when you retire in 10 years.

    You assume that you will have a 6% average annual rate of return from your investable assets. This return needs to be adjusted for inflation.

    The formula for this is [(1 + expected rate of return) / (1 + inflation rate)] -1.

    [(1 + .06) / (1 + .03)] - 1 = .029, or 2.9% on an average annual basis adjusted for inflation.

    You want to plan to live at least until age 90. So, if you retire at age 65, you will spend at least 25 years in retirement.

    • Payment (PMT) = -63,836.03
    • Number (N) = 25
    • Inflation (I) = 2.9%
    • Future Value (FV) = 0
    • Present Value (PV) = [Compute] ?
    • Excel Key Strokes:

      • Type =pv(.029,25,-63836.03,0). Hit ENTER/RETURN.
        • rate = .029
        • nper = 25
        • pmt = -63,836.03
        • fv = 0

      The PV is $1,124,074.26. This represents the amount of investable assets you will need at the beginning of your retirement, 10 years from now.

      Now that you have done a calculation for yourself and know how much you will need, it’s time to stress-test your financial capabilities using a Monte Carlo simulation. This simulation will determine a probability of success for you based on variables that include a market correction, recession, reduced social security benefits, long-term health expenses, inflation, and interest rates.

      At Palm Capital Management, we have the technology to assist you in discovering your financial capabilities at retirement. Contact us to schedule a no-obligation consultation.

      805.727.2000 |

      This article was written by Alano Massi, a CERTIFIED FINANCIAL PLANNER™ practitioner and Managing Director at Palm Capital Management.
      Alano D. Massi is an Investment Advisor Representative with Dynamic Wealth Advisors dba Palm Capital Management, LLC. All investment advisory services are offered through Dynamic Wealth Advisors.