Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Tuesday, June 8, 2010

Is Seven Figures Enough?

A friend in his late forties recently told us of his plan to retire in his early fifties after amassing a seven-figure portfolio. He said he planned to just live off the interest and dividends. He wasn’t going to touch his principal. Surely such a tidy sum would meet his retirement needs!

It quickly became clear that the income he anticipated needing was based on what he thought he required in today’s dollars. We asked if he had considered what the effect of inflation would have on his retirement. Did he understand that over a twenty-year period 3% inflation would erode his purchasing power by 45%? Has he thought about the fact that retiring at age 55 and living to age 95 (not unlikely with improvements in medicine) would subject his purchasing power to 40 years of inflation? It would most assuredly necessitate tapping into his principal.

Higher taxes and market volatility could also inflict a heavy toll on his plans. He was clearly surprised that such a large nest egg might not be enough. We pointed out that while his plans could fall short, they also might well succeed.

The issue, we told him is that more detailed planning was required to better assess his situation. How much would he really need to live on in retirement? Would his house be paid for when he retires? Might he and his wife downsize? What might inflation be in the future? How much Social Security income should he plan for? What might the future tax rates be? How might the market affect his plans?

The bottom line: some in-depth planning with varied assumptions was required to truly assess our friend’s retirement plans. The ability to generate Monte Carlo simulations and bad-timing scenarios (techniques included in sophisticated financial planning software) would be extremely helpful to better assess his retirement plans. The lesson for all is that seat-of-the –pants retirement planning may well lead to great disappointment in one’s later years. How much is enough depends on a whole host of factors.


Post a Comment

Subscribe to Post Comments [Atom]

<< Home