How to Figure Out What You Really Need to Retire Comfortably by Howard Hook, CFP®, CPA As published in New York Daily News “Money Pros” on March 12, 2014 Question: I hear so many conflicting reports about how much money I will need in retirement. How do I really figure out how much I’ll need to live comfortably in my golden years? Answer: Determining how much you need to retire comfortably is unique for each of us. Different goals and dreams, as well as differing means to achieve those goals, make any magic number obsolete. The best way to figure out how much you will need is to prepare a retirement cash flow report. Make a list of what you expect things to cost once you’re retired. Don’t forget to add certain expenses that you may incur, such as more travel, golf or medical expenses. Likewise, don’t forget to remove expenses that you will no longer have, like commuting costs. Look at your sources of income once retired. This would likely include Social Security, pension, and income from investments. However, don’t get overly worried about your investment income. Many retirees assume they will need to live off of interest and dividends. Given the low interest and dividend rate environment we are in as well as the likelihood of higher inflation in the future, retirees may incorrectly think that they cannot retire because this investment “income” is not enough. Instead, you should look at the expected total return that your investments are likely to provide - interest or dividends, plus price appreciation. Retirees who have a well diversified portfolio of stocks and bonds should not be afraid to withdraw more than the interest and dividends in their account because some of the increase in their portfolio will be due to growth in their investments, not just the income. Of course you should use caution when it comes to withdrawals. A 65-year-old retiree who needs to withdraw much more than 5% of his or her portfolio value each year may be withdrawing too much. If your income sources are greater than your expenses. then things are looking good. But you’re not there yet.Inflation needs to be taken into account. Fortunately, many retirees are living much longer today than their parents did. Unfortunately, a longer life expectancy means expenses are more susceptible to price increases. It’s not uncommon for a retiree today to expect to spend 30 years in retirement. That means that variable expenses may more than double over that 30-year period. Income sources need to keep pace with this inflation, or the money will run out. If your sources of income exceed your expenses just barely, chances are that inflation will eventually get the better of you and your standard of living may decline at some point during retirement. If so, you may want to go back to the drawing board and re-assess your cash flow report. Don’t despair. You can adjust by working part-time, for example, or downsizing. With such a long planning period, a small change in your income and expenses can go a long way towards achieving a comfortable retirement.