Retirement Planning Reality vs Calculator Tools Software by LPL Financial Advisor Joseph Krier CFP®

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With all the financial advice, software programs and calculators out there, the average person is overwhelmed with ´help.´ The purpose of this article is to cut through the nonsense and noise. I will give you a couple simple steps and hit you with a few bits of reality that you must level with yourself on.

The basic tenant of all retirement planning is your annual income need during retirement. Let´s get real right off the bat. Are you pampered? Spoiled? A shopaholic? Or are you frugal and always within your budget? Common retirement planning software says that most people need about 70% of their working life income to keep them satisfied in their retirement life. Take out your checkbook (or go online) and review your last 3 to 6 months of spending to get a true look. Group all the fluff together and keep it real.

Let´s say your number is $12,000 per month or $144,000 per year. Let´s adjust this number for taxes. Meaning, what amount do you need to earn before the IRS visits, in order to net your $144,000? Take your estimated tax rate, as a decimal, add it to 1 and multiply times your annual income need. In this example I used a 35% tax rate ($144,000 x 1.35) to arrive at $194,400. Yet another reality check.

Now that we have an adjusted number, we can work on determining your various sources of revenue. Social Security, military pensions, corporate pensions, and alimony all qualify as part of your retirement income and help. Let´s say your total retirement income from all sources other than investments is $34,400. Another reality check: that means you need to generate $160,000 ($194,000 - $34,400) per year from your investments.

Two schools of thought here: 1) Preserve your asset base and generate enough income to live on; or 2) Spend your asset base down over your lifetime, leaving nothing to your heirs. In the second scenario, of course, you still want to have the potential for investment earnings, but you´ll need a smaller asset base to get the job done. For this discussion, let´s assume you want to have enough investment assets to generate your required income. Step one: determine a reasonable target rate of return on a conservative investment portfolio. I´ll use 5%. NOW we can solve for your target retirement investment asset base. $160,000 required income from investments divided by your expected rate of return on your investments 5% ($160,000/.05) = $3.2 million.

So there you have it, a target number based on your needs and your expectations. The next reality based question is, "Are you there yet?" If so, congratulations, you can get very conservative and sail off into the sunset. If not, time for more tough questions: Are you spending too much? Saving too little? Will you have to work longer than expected? Will you have to adjust your retirement lifestyle expectations? All tough questions that must be asked…and answered in a realistic fashion.

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This is a hypothetical example and is not representative of any specific situation. Your results may vary. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult a financial advisor prior to investing.

Joe Krier is President of Krier Wealth Management, a firm with financial consultants registered in 23 states, providing asset management services and estate management services as a Certified Financial Planner, and can be reached at 800-624-2376. Securities and Financial Planning Services offered through LPL Financial Member FINRA/SIPC.