Retirement Survival A Simple Framework for Success

By Mark Cernese While success in retirement means different things to different people, in this context, I will refer to success in retirement as adequately meeting all of your basic needs for a comfortable lifestyle food, shelter, adequate level of disposable income etc. The following is a simple framework that outlines the necessary steps you can take to achieve success. Lets start with a hypothetical example and some reasonable assumptions: 1) 45 year old (male or female does not matter) 2) $150k in retirement assets 3) Homeowner Current Value $250,000 4) $50,000 in annual earnings (to calculate Social Security Income) 5) Retire at 70 years of age 6) No Defined Benefit/Pension Plan available This hypothetical example will appear familiar to many people. By this stage in life, most people have some financial assets and are homeowners. The problem is that many do not have a plan to ensure a comfortable retirement, or at least a framework to operate from and devise an appropriate strategy. Hopefully this article will change that. For most people, especially private sector employees, defined benefit plans are a thing of the past. You are responsible for ensuring you have adequate income and assets to sustain yourself during retirement. Here are the following strategies you can deploy, given a current, hypothetical level of resources, to have a high likelihood of enjoying a comfortable retirement: 1) Contribute at least $250 per month to your tax advantaged IRA and/or 401k. Starting with $150,000, contributing $250 per month, and earning a 7% nominal return over 25 years will equal 1,009,875.37 at retirement.

2) Payoff your house. Regardless of how much you owe, it is imperative you devise a strategy to pay off your home by the time you retire (more on why in a moment). In this hypothetical scenario, there is 25 years left to retirement. Even if you recently refinanced your mortgage into a new 30 year term, you can easily calculate the additional principal you must pay on a monthly basis in order for your home to be paid off by the time you retire.

3) Continue working until your 70 years old. I know this might not be what you want to hear. However, if you are in a similar situation as this example, you are behind the curve if your goal was to retire turn 65 years old. Those extra 5 years of saving and compounding your assets could be the difference between being comfortable and just getting by.

4) Wait until your 70 years old to start collecting Social Security benefits. Retirement at age 70 produces the highest ratio of retirement benefit to AIME (Average Indexed Monthly Earnings). Now lets look at how each of these four action items translates into a comfortable retirement by translating sustainable income: Your nest egg should have grown to $1,009,975 at retirement (while nothing is guaranteed, assuming a 7% nominal return on your investments over a 25 year time frame is a reasonable assumption). Many studies have shown that a 4% withdrawal rate, adjusted for inflation, is a reasonable assumption to use when turning your investment portfolio into a stream of monthly income. To be conservative (and because interest rates are very low right now), lets assume you start with a 3.5% withdrawal rate that adjusts for inflation. This equates to $2945 per month (rounded to the nearest dollar). This level of withdrawal enables your portfolio to have a high likelihood of lasting through retirement. Take out a reverse mortgage on your home (now paid off). There are pros and cons to a reverse mortgage that are beyond the scope of this article, but in this scenario, a reverse mortgage is an excellent way to generate guaranteed monthly income from an asset that would otherwise be sitting there, dormant. Currently, the maximum monthly payment you receive would be approximately $811. In 25 years, assuming a 3% inflation rate, the monthly payment would be around $1698. Continue working until your 70 years old. This by itself has no mathematical implications. It simply enables your financial assets to grow and gives you enough time to pay off your home while waiting to collect Social Security Benefits. Collect Social Security Benefits at 70 years of age. Assuming $50k in wages shown above, collecting Social Security now will give you $1852 in monthly benefits. Assuming a 2% rate of inflation in Social Security benefits, this number can be expected to be around $3038 in 25 years. Of course, entitlement programs like Social Security are woefully underfunded, but I am operating under the assumption that the gap will most likely be closed by a combination of higher tax rates and benefit reductions to new participants. After all, it is politically difficult to change accrual methods to people that have been paying into the system for over two decades (as the person in the example here has done). The total expected monthly income (25 years from now) from these four strategies is: Portfolio Withdrawal (3.5% rate) Social Security Income Reverse Mortgage $2945 $3038 $1698

Total Monthly Income

$7681

Initially, this looks promising, but we must remember that this is 25 years from now and a dollar in the future is worth less than a dollar today. Under a couple of different inflation assumptions, the value of this income in todays dollars would be approximately $4038. I believe it is reasonable to assume that most people could live comfortably in retirement on $4038 per month. Of course your individual circumstances will be much different. The preceding scenario was just a hypothetical example to outline the strategies that can be used to ensure a high likelihood of a secure and comfortable retirement. Maybe you are able to contribute more to your savings plan; maybe your investment returns will be higher (or lower). You may not need, or want, a reverse mortgage. And, of course, you may not want or be able to work until your 70. Thats fine too. Just remember, all of these variables will affect the final calculation. In summation, there are many strategies available to ensure, at the very least, a comfortable and sustainable retirement. It is important to remember that the strategies mentioned here are dynamic. You should sit down with a qualified investment advisor and develop a plan to ensure your retirement survival.
About the Author: Mark Cernese is the COO & Portfolio Manager at ATA Financial Group located in Whitehall, PA. He can be reached at Mark@atafinancial.com. About ATA Financial Group: ATA Financial Group specializes in providing comprehensive financial services to individuals, businesses, non-profits, unions and government agencies. Our services include accounting & tax, wealth management, insurance/risk management, and senior/estate planning. This holistic approach to providing financial services ensures the most advantageous outcome, as a decision in one area often impacts other areas of your finances. Disclaimer: The example shown is hypothetical in nature and does not represent any person or actual situation. The portfolio-level performance shown is hypothetical and for illustrative purposes only. Investor returns will differ from the results shown. Nothing in this article is to be construed as investment advice. Always consult your legal, tax, and financial professional. This article does not necessarily reflect the views of ATA Financial Group and are solely the authors. If you would like to discuss your particular financial situation, please contact me directly at 610.433.9009.

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