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Ready, Net, Go
By Karen Hube, March & April 2005
How soon can you retire? The answers to three tough questions may surprise you
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Kevin Kern, 57, hopes to retire soon from his pharmaceutical sales job. So
he was delighted when a financial adviser recently said that he and his wife,
Eleanor, also 57, would be able to quit their jobs next year, assuming they
trim their expenses and make some adjustments to how their $300,000 nest egg is
invested. But Eleanor, ever the worrywart, wanted a second opinion. And sure
enough, the financial planner she met with said that if they retire that soon,
there's a good chance they will run out of money before they hit 80.
The Problem
How can two experts come up with such different answers? Which expert should
the Kerns believe? And is there a way to be certain that anyone really has
enough to retire?
The Plan
Kudos to Eleanor. She suspected the truth about retirement
planning—it's not a black-or-white issue. The answers depend on
several assumptions, from how long you will live to what return you will get on
your portfolio. Tweak those numbers and your outlook can very quickly go from
rosy to bleak.
In the Kerns' case, the first planner used wildly optimistic assumptions
about what the stock market would return on their investments. (Most
forecasters say a 7 percent return in the coming years is reasonable.) So step
one for the Kerns: dump the original financial planner. Then review the
assumptions that went into the second planner's calculations. Here are the
questions they, and anyone else calculating their retirement readiness, should
consider.
How much will we spend?
It's time to explode one of the biggest retirement myths: spending
probably won't decline much after you quit the work force. "If
you're not changing your lifestyle, your expenses are not going to go
down," says Ellen Rinaldi, an executive at The Vanguard Group. The Kerns
figure they'll need about $3,000 a month to live on in retirement,
approximately what they spend now.
How long will we live?
Actuaries can predict life expectancy with remarkable accuracy. For the
average person, that is. But about half the population will live longer. The
best approach: consider your own health and family medical history, and then
add a few years to be on the safe side. "We almost always plan to at least
age 90," Rinaldi says.
Will my money last that long?
Again, you should be looking for a reasonable idea of your chances, rather
than a yes or no answer. "What people need to know is the probability of
having enough. Is it 50 percent? Well, that's not so comforting. Is it 80
percent? That's better," says Chris Cordaro, a certified financial
planner with RegentAtlantic Capital in Chatham, New Jersey.
For the Kerns to retire next year, their savings would have to supply the
entire $3,000 per month they anticipate needing. Better to wait until full
Social Security kicks in at age 66. At that point, they'll get $1,700 a
month from the government, and their nest egg will only need to make up the
$1,300-per-month shortfall. If they're antsy, they could retire at age 62
instead, but they'll need to build up their nest egg to $375,000 before
they take the plunge to ensure they have enough. Either way, they should have
plenty of years left to enjoy the good life, especially now that Eleanor
won't be worried sick they're going to run out of money.
Karen Hube has written for Money magazine and The Wall Street
Journal.
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