A Perfect Retirement in 10 Easy Steps

This article is based on a free workshop I lead called “10 Steps to a Perfect Retirement Portfolio.” In this article, and in my workshop if you attend, you’ll find the most important things we teach investors about how to make their “golden years” as golden as possible.

There’s a lot of “meat” here, so let’s plunge right in.

TRUST ME ON THIS: IF YOU ACHIEVE HIGHER RETURNS THAN YOU PLAN FOR, YOU WILL BE ABLE TO COPE WITH THE UNEXPECTED.

Step 1: Determine what investment return you need. This is extremely basic and extremely important, for it helps determine how you will live and what choices are available to you.

Only you can do this. You can get help from your advisors and your family members, but the final decisions rest with you. This is about determining your essential needs, the things that you simply won’t or can’t compromise.

The general process for this step is simple. Figure out your essential living costs per month – the amount below which you simply cannot make it. Your definition of this will be uniquely your own.

Some people are unwilling to consider reducing their standards for housing, entertainment and other expenses, no matter what. Others know they can be happy while they lead extremely frugal lives. We know a man of quite modest resources who doesn’t have a car, lives in a tiny condominium, rarely buys new clothes or furniture and almost never eats in a restaurant. Once a year he uses his savings to take a three-week trip – he’s going to New York and London this summer.

Whatever it takes, determine the rock-bottom monthly income that’s necessary to sustain you. Then tote up your other resources such as a pension, Social Security and any other income you can count on. There will probably be a gap between this income and your monthly needs. That’s the amount that must come from your investments.

If your essential needs can be met with $5,000 a month and you have reliable income that totals $3,500, the gap would be $1,500 a month, or $18,000 a year.

With that information, you can figure out the rate of return you must have. If your investments are worth $600,000, that means you can meet your essential needs with a return of 3 percent – a figure that suggests you’ll have some breathing room. But if your assets total only $200,000, taking out $18,000 every year won’t work for very long. You’ll know right away from that calculation that you must either acquire more assets, find a source of additional income or cut your essential living standard.

This first step can be discouraging. But it’s essential because it will force you to face up to reality – ideally while you still have options available to you.

Step 2: Determine the investment return that you desire. This is an easier step. Again, it will come from a monthly-income calculation.

If you’ve done the first step properly, you eliminated some non-essential expenses in order to reduce your needs. Now it’s time to add some of them back in. Think of this as a list of optional (but highly desirable) accessories to your life: Travel, gifts, entertainment, home improvement, education … this list has no limits.

Your goal is to arrive at a figure that, if you added it to your base monthly income, would make your life much better, giving you a future worth looking forward to. This is not the place to fantasize about winning the lottery. This is a place to be realistic while you still dare to dream big dreams.

Suppose you determine that an extra $3,000 a month would make a huge difference. That suggests another $36,000 a year from your investments. You can do the math and figure out whether that is feasible.

A good rule of thumb is that you can conservatively count on withdrawing 5 percent of your portfolio every year. If you invest that portfolio well, you can keep doing that with a high probability that your portfolio’s value – and thus your annual “draw” – will gradually rise over time without much risk of running out of money.

 

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