Pre-retirement Considerations Part II

Our previous posting emphasized the need for those contemplating an upcoming retirement to get a good handle on the amounts they typically spend. Doing so provides a “burn rate” to compare against potential retirement income sources like Social Security, annuity payouts, and portfolio withdrawals.  Obviously, the goal should be to assure that the retiree household does not consume all of its resources during the remainder of its existence. This posting will look at the resource side of the ledger.

Charles J. Farrell, the CEO of Northstar Investment Advisors, developed a benchmarking methodology that compares the ratio of “retirement savings to income” at specific investor ages. Farrell published his calculations in 2006 in The Journal of Financial Planning (“Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement”) and has subsequently written a book entitled “Your Financial Ratios”. Farrell discusses the interaction between savings and debt in addition to investment returns and portfolio distribution rates. He offers the following tables:

For a 5% Return/5% Distribution Rate

For a 4% Return/4% Distribution Rate

Farrell’s tables provide some aspirational targets for retirement savers. Not surprisingly, there are many other variables that can change the outcome of any retirement projection. Personal debts clearly play a role, as do the spending rates discussed earlier. In addition, factors such as future tax rates, actual investment returns, health care costs, etc., can never be known with complete certainty. However, utilization of these tools and the incorporation of other reasonable assumptions will allow financial planners to make more meaningful assessments than simply relying on good fortune.

Do you know where you stand with your financial goals? Call Level 5 Financial for an exploratory meeting to find out how we may help you today 719-323-1240 or schedule a time.