John M. Hoffman

Certified Public Accountant

Is John Retiring? NOT JUST YET...

Accumulated Savings:

So if I have a budget of $120,000 and $24,000 will come from social security, where will the other $96,000 come from? That is what I will need to draw from my accumulated savings. To back into how much savings I need, I have to determine what a “safe” rate of withdrawal would be. The rate of withdrawal is the rate that I can take from my accumulated savings without fear that I will deplete such amounts. As I get older, the rate (percentage) that I can withdraw should increase as my life expectancy (how long it needs to last) decreases. I hear people talk about 4% as a reasonable withdrawal rate. Given that I am not certain of the age that I will (can) retire, and I think that rate is often mentioned for people younger than I plan to be at retirement, I think 4% is a conservative number to use. I realize that I will need to earn more than 4% in order to withdraw at 4% and not be dipping into capital.

The math then works out to dividing $96,000 by 4% and getting $2,400,000 in accumulated savings. This does not count any money I want to have set aside for special things like paying for weddings, grandchildren’s education, helping children buy their first house (see how this can get out of control).

So, now I have a target (sort of) for what I need to accumulate. I also have a good head start on accumulating that balance, and I have an idea of when I might want to start tapping into those investments (in my case that is five to ten years). That leaves me with how to invest my accumulated savings as well as the question of how much I need to add to it each year. The more I add each year the sooner I reach my goal.

I can set up a spreadsheet and start with my current accumulated savings (those that are for retirement income), show what income I hope to earn each year at some reasonable rate of return, show what I can add to these savings each year, and the spreadsheet should show when I get to my goal of $2,400,000. What do I use for a rate of return you may ask? I am currently using 8%. The S & P 500 index 25 year annualized rate of return from 1955 through 2013 has only had one year below 8% - 1981. A 25 year rate of return is a long period and you may wonder why I am using such a long window of historical returns for my spreadsheet that should help me determine when during the next five to ten years I will reach my goal. The reason is that while I am still working, my plan will be able to absorb any downticks or benefit from any up ticks in performance. What I mean is that if the spreadsheet shows that I need to continue working and saving for five years and then the next three years are bad years for my investments I can keep working and saving and it simply might take a little longer to get to my goal.

 Here is the important thing that I do. I set up my spreadsheet and I monitor it occasionally. Monitoring means I update it for investment values. I also review my budget to make sure that I am comfortable with it. My retirement plan is like sailing a boat across the Atlantic. Slow and steady with slight adjustments along the way - not sure exactly what the weather and winds will be like on a daily basis. My retirement plan is not like a rocket that is pointed at a target and fired.