Engineer Your Retirement Plan Analysis

Alano D. Massi, MBA, CFP®
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“How much money will I need when I retire?”

“What age can I retire given the money I will need?”

“What do I need to do between now and my retirement?”

I am sure you have been asking yourself these questions, and/or want to speak with a financial advisor about it, so that’s why I laid out a basic example that can help you engineer your own retirement plan analysis.  Before investing your hard-earned money, you should consult a financial advisor to check your analysis, because your retirement plan should dictate how you invest for the long-term.  It’s essentially the same approach as building a home… before construction begins, there is always a blueprint.  Think of the financial advisor as a construction foreman.

Utilize the steps through this example to conduct your own basic retirement plan 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 retirement plan 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 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 and your financial advisor are prepared to answer the main question in the retirement plan.

Your retirement plan 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) = 9%
  • Future Value (FV) = 0
  • Present Value (PV) = [Compute] →

▹Excel Key Strokes:

o  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 work with a financial advisor and 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.  We are based approximately 30 miles northwest of downtown Los Angeles, California, and we service individuals and families all across the United States.  Individuals tend to have different preferences when communicating with a financial advisor about a retirement plan, so we are happy to accommodate an in-person meeting, video conference, or tele-conference.  Contact us to schedule a no-obligation consultation with a financial advisor.