In the previous article, we discussed the many different types of retirement plans. We also came to the difficult truth that we must start saving early to achieve our retirement planning goals. Answering the coveted question “How much is enough to retire on?” can prove to be very difficult for many individuals. When we know how much enough is, how do we divide that large, and sometimes frightening, number into the years we have left in our working lives? Lastly, how do we monitor our progress?
First, let’s appease the attorney in all of us by disclaiming that a retirement plan will make some assumptions. The disclaimer on the disclaimer, however, is that all planning (and the assumptions associated with such planning) must be revisited at least on an annual basis. So now the attorney in all of us can rest easy. Back to our 3 questions: How much is enough? How do we get to enough? How do we monitor our actions and results?
For this article, we will assume a retirement replacement income of 50% of our dentist’s income. This income stream can come from government sponsored plans (i.e. social security), IRAs, defined contribution plans, defined benefit plans, and lastly from after tax savings accounts.
How much is enough? Let’s assume a 35 year old dentist with an income of $150,000 per year. Well, simple math states that the dentist would need $75,000 per year of retirement income (50% of $150,000). Our dentist would like to retire at age 65. Yes, that’s 30 more years of practicing…so keep smiling!
So our retirement replacement income goal is $75,000 per year at age 65. Assuming a 9% rate of return and 3% inflation, our dentist would need $1,891,449 dollars to kick off $75,000 of inflation, adjusted income for life. So we answered how much. Remember, we recommend reviewing your retirement plan at least annually. In some years, the investments may do better or worse than 9%, and the updated retirement plan would account for such changes.
So $1,891,449 is a pretty large number? How do we divide $1,891,449 into a more manageable 30 year financial goal. Remember, we have 30 years to save $1,891,449. Using the same assumptions mentioned above (9% rate or return and 3% inflation), our dentist would need to save $15,183 in a pretax investment vehicle and $22,101 in an after vehicle. Remember that the pretax asset will be taxed as withdrawals are being made, while the after-tax investment account will only be subject to capital gains and dividends received on a yearly basis.
Retirement planning does not have to be complicated. Identify the amount of annual income you want in retirement. Upon doing so, identify how much needs to be saved per year to reach your income goal. Monitor, track, and be accountable to your retirement planning at least annually.
Too many people wait to start their retirement income planning. They compound this problem with “paralysis by analysis”. By waiting 3 years, the above mentioned dentist needs to save $20,123 in a pretax vehicle, and $27,645 in an after tax vehicle. Start early, keep it simple, and review your retirement blue print at least annually.
Next month we will discuss saving for retirement versus saving for college education. Hope you found this article helpful.
James DiNardo, MSFS ChFC CFP®
CERTIFIED FINANCIAL PLANNERTM
Wealth Management Advisor
Pioneer Financial
245 Park Avenue Suite 1800
New York, NY 10167
Direct: 646-366-6713
