Read? It’s safe to invest entire life savings in stocks. But it can be safer!!!
For pre-retirees, what do you think it's safe?
Trust this one?
Read? It’s safe to invest entire life savings in stocks
or better to do this?
Read? Is Your Nest Egg Holding Up?
The Balance Sheet
A
more sophisticated way to measure the success of a retirement portfolio
is the one used by large pension plans. You compare what's called the
actuarial present value of your assets and liabilities. The twist:
Instead of looking at current assets and liabilities, you look at the
value of all your expenses in retirement as a lump sum as compared with
the value of all your assets as a lump sum.
Take
a married couple where the husband, 69, and the wife, 68, have an
after-tax portfolio of $1 million, an annual Social Security benefit of
$25,000 with a 2.5% cost-of-living adjustment, and a pension of $10,000 a
year with a 75% survivorship benefit and no inflation adjustment. That
income stream's present value would be $588,686. Add that to the value
of their portfolio ($1 million), and you get $1,588,686 in total assets,
in today's dollars.
On the liability
side, if the couple wants to spend $60,000 a year in retirement, after
taxes, with a 2.5% cost-of-living adjustment, they would need $1,402,156
in today's dollars to fund their living expenses.
In
essence, investors with a surplus are in good shape, while those with a
deficit don't have enough to pay their expenses in retirement. The
latter likely would have to adjust their savings, investments or
projected expenses.
Few advisers—just
15% in Russell's survey—use this method, but Mr. Greenshields suggests
that it works the best. A balance sheet uses today's market information
and today's interest rates as a starting point, he says.
"Our
take on this approach relies on using current interest-rate curves,
specifically Treasury yield curves to reflect a 'risk-free' rate. Those
are about the most robust predictions of the future you can get."
Uncle8888's Retirement Balance Sheet
(Liabilities @ 3% inflation rate. Assets exclude value of residential home and Self-insured Fund of CPF RA, SA, MA. MediShield and Emergency Fund)
Uncle8888's Formula
Expected Monthly Expense =
(Highest ever monthly expense + 4 x Average monthly expense + Lowest ever monthly expense) / 6 = $X,XXX
Annual Expected Expense = 12 x $X,XXX = $YY,YYY
Enough = 25 x $YY, YYY = $Z,000,000
Read more? Retirement Income for Life??? (9)
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