Preparing for Your Retirement - Start Now

Outline of the my (Richard Howard) April 26, 2006 presentation for the Technical Writing Program at the University of Massachusetts at Amherst.

The Problem:

• Defined benefit retirement plans (pensions) are being replaced with defined contribution plans, 401(K), and Individual Retirement Accounts, IRAs.

• Social Security payments are uncertain. Monthly payments will fall.

• Health care costs are rising. Your premiums, deductibles and co-pays will rise.

• Inflation is always present. At a 3 percent rate of inflation prices double in 24 years. At a 5 percent rate of inflation prices double in 15 years.

• Debts must be paid.

The Solution:

You are responsible for your financial well being.

Your choices include:

• Make tons of money or little money.

• Work more than one job.

• Work late in life.

• Spend less and save more.

• Become a regular saver and an astute investor.

Become a Regular Saver

Long before you retire you should:

1. Estimate your annual retirement expenses and income.

2. Determine the size of your retirement nest egg.

3. Determine how much you must save and invest each month to achieve your nest egg.

What are your retirement expenses and income?

Estimate your annual expenses (housing, car, medical, insurance, taxes, food, debt payments and other). Estimate your annual income from all sources - social security, retirement plans, interest, dividends and other.

How much money will you need in your retirement nest egg?

After you retire, you will use your retirement nest egg to pay bills and medical expenses and take vacations. To ensure that you never run out of money during retirement, your annual dollar withdrawal should equal the amount of money you add to the nest egg from interest and dividend payments and capital gains. If the dollar amount added each year is equal to or exceeds the amount that you withdraw, your principal will never fall. And it could increase.

The following simple formula computes the dollar amount that you must accumulate to ensure a stable nest egg:

Nest Egg Dollar Amount = Annual Dollar Withdrawal / Rate of Return on Nest Egg

The next table gives examples of nest egg dollar amounts.

Required Nest Egg Dollar Amount
Annual Withdrawal
Return	$20,000	$40,000	$60,000
4%	$500,000	$1,000,000	$1,500,000
6%	$333,333	$666,667	$1,000,000
8%	$250,000	$500,000	$750,000

For example, for a 4% return on your nest egg you would need to accumulate $1,500,000 to withdrawal $60,000 forever without reducing the value of the nest egg.

How much money must you save?

Each cell in the next table shows the dollar amount accumulated if you saved one dollar every month for a given number of years and you received a fixed rate of return on your invested money. For example, if you saved one dollar each month for 50 years and you received a 4% rate of return on your investments, you would have $1,909.36.

Dollars Accumulated - Invest One Dollar Per Month
Rate of Return
Years	2%	4%	6%	8%
10	$132.72	$147.25	$163.88	$182.95
20	$294.80	$366.77	$462.04	$589.02
30	$492.73	$694.05	$1,004.52	$1,490.36
40	$734.44	$1,181.96	$1,991.49	$3,491.01
50	$1,029.61	$1,909.36	$3,787.19	$7,931.73

To find out how much money you must invest each month to achieve a nest egg of a given amount, divide the dollar amount of the desired nest egg by the dollar amount in a cell. For example, to achieve a one million dollar nest egg in 20 years at a 4% rate of return, you must invest $1,000,000/$366.77 = $2,726.50 each month. For a 10-year period you must invest $1,000,000/$147.25 = $6,791.17 each month.

What do these dollar amounts tell us?

Start saving and investing early in life. If you wait to save and invest until just before retirement, you will have to save thousands of dollars each month.

Astute investors will have the most money. Look at the accumulations for higher rates of return. But do not over estimate your rate of return when you do your computations. If you do, you will tend to save less. Don’t try to substitute savvy investing for old-fashioned thrift.

Become an Astute Investor

• Stocks and the stock market are fickle. Stock prices go up and down. Buy on the price upside. Avoid buying at tops. Avoid the price downside. See three charts. See Chart Gallery for a sampling of charts on buyupside.com.

• Risk and reward - more reward means more risk. Small companies are more volatile than large ones.

• Buy what you understand. Keep your investments simple. Sleep tight.

• Beware of buy propaganda. Brokers and most financial planners live from commissions.

• Minimize commissions and fees. Control your costs. Seemingly small fees reduce your total return.

• Buy investments that pay regular dividends. Reinvest dividends.

• Invest every month. Establish automatic transfers from checking account to investment accounts.

Own These Safe Investments

• Life-cycle fund or target funds. Buy from Vanguard, Fidelity and other low-fee providers. Buy and hold these funds.

• Index funds. Buy from Vanguard, Fidelity and other low-fee providers.

• Exchange-traded funds (ETFs). Buy from a broker.

• Certificate of Deposits. Check bankrate.com for rates.

• NOTE: Your primary residence is not a liquid investment.

Avoid These Investments

• Annuities. Complex contract that includes insurance and capital appreciation provisions. High fees and penalties.

• Hedge funds. High fees and high risk.

• Most managed mutual funds. High fees and questionable performance.

• Bonds and bond funds. You can lose money with bonds.

• Partnerships. Very high fees and not liquid (real estate and oil and gas).

• Any investment that cannot be explained in one or two brief paragraphs. Understand what you buy.

Posted April 25, 2006.