Locally based CPA firm since 1956

In October the Dow declined (4.27%) and remains in negative territory for year at (7.10%), the S&P 500 declined (2.34%) with a year-to-date gain of 1.21%, and the NASDAQ declined (1.48%) but remains positive Year-To- Date 21.61%. The bond market, as measured by the performance of the 10-year U. S. Treasury Note rebounded 21.6% in October but remains negative a whopping (104.6%) year-to-date.

The election is upon us. Please exercise your constitutional right to vote. If you choose not to vote, then you have not earned the right to complain. ☺

Perhaps the most frequent question we get is “Can I retire when I am ____years old (fill in the blank). Here’s how to do the math.

First you must work a budget that meets your desired lifestyle in retirement. Most financial planners recommend 80% of your last working year’s take home pay. I beg to differ. The best way to work a budget is to take your credit card statements and bank statements for the previous 12 months and add up all the money you spent during that 12 month period. Once you get up off the floor from shock, then comb through the expenses and look for the exceptional one-time expense that you truly do not expect to repeat such as the cost of replacing that air conditioning system. Now add back ½ of those exceptional one-time expenses because life happens and this year it was the a/c next year it may be the roof. Now that you know how much your lifestyle costs you, utilize that number. Don’t worry thinking about things like “I may spend less when I retire because I won’t have to drive to work every day”. Trust me, you will find things to fill up your day and most cost money.

You must divide your annual expenses by a number in order to know how much you should have saved in your income generating portfolio to live comfortably without eroding the principal. Traditional financial planning software will recommend 4%. With today’s interest rates being at historical lows I suggest you will either need to utilize 3% or you will need to mix a few more stocks into your portfolio in order to give your portfolio a fighting chance at keeping up with withdrawals and inflation. Historically a neutral portfolio in the first few years of retirement has been about 60% stocks and 40% bonds or other income generating investments. Today’s environment may mean that a neutral portfolio may be 65% stocks or even 70% stocks. None-the-less, take that number you arrived at for your annual expenses and divide by 0.03 and you now know the number you must have in an income generating portfolio in order to meet your income need in order to maintain your lifestyle. As an example, a person whose annual expense is $96,000 would need to have $3,200,000 in a portfolio. However, some of that may be covered by social security or a pension. So let’s say social security provides $24,000 of that annual necessary income. Now the need is $96,000 – $24,000 or $72,000. The necessary portfolio amount to meet that need is $72,000/0.03=$2,400,000.

Whether you agree or disagree, whether your situation is fairly straight forward like my example or more complicated, my best advice is to sit down with your financial planner or investment advisor and go through this exercise with him/her. First do your homework and figure out how much income you need to maintain your desired lifestyle in retirement. Armed with that information and an inventory of your sources of income, you and your advisor should be able to come up with a goal to shoot for so you will know whether or not you can retire when you turn ____years old.

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Have a question? Let me know! Email me at kcompton@wcmtexas.com.