How to Plan for Retirement

Nest egg seems a strange term for your retirement money yet it carries a very real comparison. Though retirement planning and eggs are inherently strong in their structure, in the wrong circumstances both can be very fragile. Nest eggs are tricky work. They take discipline, timing, research and responsibility.

After you follow the rules as best you can -- maximize savings, minimize spending and contribute to your retirement plan --�what then? When do you have enough to quit working and enjoy your "golden years?"

Here's the problem. In all likelihood you will retire sooner and live longer than the generation ahead of you. Retirement for you may reasonably be measured in thirty to forty years. Will you be sentenced to live forever under the veil of fear that one day your money may be gone while you still aren't?

For many years savers have moved from a preponderance of stocks to bonds as they age. As you age, replacing your nest egg becomes more difficult than keeping it even at minimal rates of return. Taking your nest egg home and hiding it under the mattress is a sure fire way to outlive your money. A better bet for your nest egg may be to move your safety horizon way out. Keep your nest egg actively, if conservatively, invested as long as you remain employed.

The stock market over any 10-year period out-performs bonds on an order of double. Over the long haul bonds and cash may keep a steady stream of income flowing your way year after year, but that steady flow of income will buy less and less when inflation is factored in.

Protecting the principal while earning a livable and inflation-protected return are equally important to give yourself the lifestyle you worked hard and saved for.

How much do you need to be comfortable while not working? I can't know, there are too many variables. However, we can readily calculate a pretty good estimate. How much after tax income do you think you need to live the lifestyle you want? Don't forget to consider income taxes unless you are wholly invested in tax-free bonds.

Take the income you will require and divide the amount by 5 percent. Five percent is a reasonably safe yield expectation on most investments. Understand that you will probably earn more, more like 10 percent, but that excess must be left in your investment account. The excess becomes a part of your capital protecting you against inflation. You will have more principal yielding 5 percent allowing your income to grow over the years as prices go up.

The calculation becomes very simple. For example, assume income must be $25,000 your first year (of freedom). Divide $25,000 by 5 percent and the size of your next egg must be $500,000. Over time you will likely earn 10% and the balance you don't spend increases the $500,000 to $525,000 which next year allows $26,250 income. The third year your principal is $551,250, which allows $27,600 income. And so on. The magic is in allowing part of your return to be reinvested.

Remember the $500,000 in the example is not necessarily simply your cash, stocks and bonds. Perhaps your home has a great deal of equity and moving to a less expensive place can yield resources that can be included in your principal. Include your Social Security income in your income calculations. Don't forget to make your income calculation based on your new freedom based lifestyle that probably will not require many of the fixed and variable expenses required while you are working.

You will be surprised at how little capital wealth is required for a comfortable retirement. I certainly was.

Ric Reily is the author of two books: "Money Is The Root Of All - Skip The Debt Habit," and "Gregory's Hero." His firm CFO On Call provides small business finance and operations consulting. Ric is married to John, his partner of 26 years, and lives in South Florida with their Havanese dog, Buckley. You can reach Ric at [email protected]