{"id":40513,"date":"2013-08-01T08:38:42","date_gmt":"2013-08-01T12:38:42","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=40513"},"modified":"2013-08-01T08:38:42","modified_gmt":"2013-08-01T12:38:42","slug":"the-four-numbers-every-retiree-should-know","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/08\/01\/the-four-numbers-every-retiree-should-know\/","title":{"rendered":"The Four Numbers Every Retiree Should Know"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

If you are a Baby Boomer and looking forward to retirement, you might want to sit down with a pencil and a notepad.\u00a0 Retirement is a lot more complicated than it used to be, and not just because retirees in the post-pension era are having to take more responsibility for their investment allocations.<\/p>\n

The investing environment itself is shifting\u2014bonds have reached the end of a 30-year bull market, globalization means that events in faraway places have a direct impact on the stock and bond markets here, and Social Security\u2014the single most important source of income for a majority of Americans\u2014may be facing significant cuts in the years ahead.<\/p>\n

So, before you quit your job and venture into the next stage of your life, stop for a minute to consider a set of numbers that could make the difference between retiring comfortably and having to move in with your adult children.<\/p>\n

1. What is a reasonable estimate of your cost of living?<\/strong><\/p>\n

This should be obvious, but most Americans dramatically underestimate their living expenses.\u00a0 Be honest here, and thorough.\u00a0 What do you pay in rent or in property taxes and insurance? What about utilities?\u00a0 And what about medical expenses or insurance premiums not covered by Medicare?<\/p>\n

What do you spend in a given month on restaurant dining and entertainment?<\/p>\n

Don\u2019t just look at your last month\u2019s expenses and multiply by 12, as your expenses can vary wildly based on weather (utility bills) or based on holidays and birthdays.\u00a0 If you like buying your grandkids expensive Christmas presents, make sure to take these into account.<\/p>\n

Whatever total figure you come up with, tack on an additional 25%.\u00a0 No matter how thorough you are, I promise you that you forgot something.\u00a0 And you want a little wiggle room to allow for unexpected expenses or for the occasional off-budget luxury.<\/p>\n

The total you come up with here is the single most important figure; it\u2019s the dollar amount you\u2019ll need to generate from your portfolio investments and from Social Security.<\/p>\n

2. How much can you expect to receive from Social Security?<\/strong><\/p>\n

According to the Social Security Administration<\/a>, 53% of married couples and 74% of unmarried beneficiaries depend on Social Security for at least half of their income.\u00a0 A shocking 46% of unmarried beneficiaries rely on Social Security for 90% or more of their income.<\/p>\n

To put it lightly, Social Security matters.<\/p>\n

If you are near retirement age, you should receive regular correspondence from the Social Security Administration that outlines how much annual income you can expect to receive depending on what age you choose for retirement.\u00a0 If you\u2019ve never been notified, contact your local Social Security office and ask.<\/p>\n

To play it safe, assume that all of your Social Security benefits will be fully taxable.\u00a0 Currently, they are not.\u00a0 But given the fiscal position of the government, we should assume they soon will be.\u00a0 Better to err on the side of caution.<\/p>\n

Marginal rates are always something of a moving target; we\u2019ll use a rate of 28% for the purposes of this article.\u00a0 Take the income estimate from the Social Security Administration and multiply it by 0.72 (which what is left over after the 28% tax).<\/p>\n

3. How much do your other investments need to earn to meet your retirement expenses?<\/strong><\/p>\n

Take your expense estimate from question one and subtract the after-tax Social Security payout from question two.\u00a0 Also subtract any other fixed income streams you expect, such as from a traditional pension or a trust.\u00a0 The amount left over is what you\u2019ll need to generate from your investment portfolio.<\/p>\n

This number is critical because it will determine what kind of returns you need to generate\u2026and what kind of risk you can take.<\/p>\n

Let\u2019s look at an example.\u00a0 Let\u2019s say you need $100,000 per year to maintain your lifestyle in retirement and that Social Security is on the hook to pay you $50,000.\u00a0 After taxes, that $50,000 becomes $36,000\u2026meaning you\u2019ll need your portfolio to throw off $64,000 in after-tax income.\u00a0 On a $1.5 million portfolio, that amounts to a return of 4.3% after tax, or a little less than 6% before tax (for now, I\u2019ll assume all investment income is subject to the same 28% tax rate).<\/p>\n

Is that a realistic figure for you?\u00a0 If not, you may need to downsize your retirement goals or postpone retirement for a few more years to build a bigger nest egg. \u00a0Personally, I wouldn’t want to bank on generating a 6% return given that the 10-year Treasury yields less than half that. I wouldn’t be comfortable assuming much more than about 4%…which in our example here means that we need a larger portfolio or a smaller retirement.<\/p>\n

Be honest with yourself here.\u00a0 It\u2019s better to make any hard decisions today, while you can still make changes, than in retirement when it is too late.<\/p>\n

4. What do you expect the inflation rate to be?<\/strong><\/p>\n

Inflation is the single most dangerous figure for would-be retirees because it is the one they never see coming.\u00a0 Inflation creates a nightmare scenario: your expenses rise while your income remains fixed.<\/p>\n

The news here isn\u2019t good.\u00a0 One of the easiest ways\u2014or most cowardly, depending on your point of view\u2014for the government to reduce its Social Security liabilities is to tinker with or eliminate cost of living adjustments.\u00a0\u00a0 It\u2019s a stealth form of taxation and one that hits retirees particularly hard.<\/p>\n

To play it safe, we should assume that your Social Security payout will be constant\u2014with no inflation adjustment at all.<\/p>\n

This means that your investment portfolio will need to generate enough to make up the difference.\u00a0 The math here can get a little cumbersome, but bear with me.\u00a0 If you assume an inflation rate of 3%, your $100,000 per year in living expenses will be $103,000 after the first year. This means that your portfolio will need to generate $67,000 instead of $64,000 (remember, we\u2019re assuming no adjustment from Social Security).<\/p>\n

On the same $1.5 million portfolio, this means a required after-tax return of 4.5% rather than 4.3% and a pre-tax return of 6.25%.<\/p>\n

That may not sound like much, but remember that inflation is like interest.\u00a0 It compounds over time.\u00a0 By year two, you\u2019re looking at expenses of $106,000\u2026and a required pre-tax return of 6.5% on that same $1.5 million portfolio.<\/p>\n

To compensate for this, you need portfolio growth and\u2014more importantly\u2014adequate exposure to income-producing asset classes that have built-in inflation protection\u2014things like REITs, MLPs and certain dividend-paying stocks.<\/p>\n

And more than anything, you need a margin of safety.\u00a0 You need a little bit of \u201cwiggle room\u201d in the event that your investments don\u2019t generate as much income as expected or in case inflation is higher than forecast.<\/p>\n

I used very conservative numbers in this article, but I encourage you to do the same.\u00a0 It\u2019s better to be too conservative and end up with a bigger cushion than expected in retirement than to find yourself strapped for cash and forced to give up that house on the golf course.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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