Most investors do not know how much money they will need for retirement or financial security later in life.  Such lack of awareness is a paradox because this target number is such a critical variable when planning for retirement.  One easy way to determine the monetary figure is described in a 2002 Charles Schwab study.  It concluded that you will need $230,000 of assets for every $1,000 of monthly income ($230 of assets for every dollar of monthly income, an annual payout rate of 5.2% during your retirement years).  At $5,000 per month in necessary income, you will need $1,150,000 of assets.  At $10,000 per month, you will require $2,300,000.  At $20,000, you will need to accumulate $4,600,000.  Aggressive investors can target less, but not by much for certainty that the money will last, keep pace with inflation, and have the potential of residual to pass on to your heirs.  The study also found that sometimes less initial principal was needed to achieve these goals (especially  when the markets had significant positive performance with low volatility during the initial retirement years).  The study made the assumption you will spend nearly as much at age 80 as you do at age 65 however, if you have low expenses and are in good health, your spending needs may decrease later in retirement.     

Longevity is one of the primary reasons that creates the need for substantial assets.  According to the Annuity 2000 Mortality Table, the joint life expectancy of a couple at age 65 is 92 - a horizon of 27 years or more if you retire at age 65.  There is a 25 percent chance one partner will live to age 97.  Life expectancy has increased two or three years in just the past decade alone.

Pre and early retirees are just beginning to recognize the financial implications of living longer.

The choice you make here is probably the most important financial decision of your lifetime.  In a way, it’s like deciding where to park your car for easy access, convenience, and safety when it’s off the road, only with much more serious financial ramifications.  In tandem with the five simple steps for protecting your retirement savings, your decision about 401(k) assets can make or break your retirement.

To gauge the appropriateness and possible ramifications of each option, you will need to take the following factors into consideration:

• When will you need the money?
• What will your tax bracket be in retirement?
• How is your health?
• How much money will you need for retirement?
• How much is the lump-sum distribution?
• How old are you?
• What is your estate plan?
• Who will pay the income tax?
• Is creditor protection a big issue for you?

Faye Bagby

American Financial and Retirement Services, LLC
(972) 733-0026 Dallas Area
16475 Dallas Parkway, Suite 240
Addison, Texas 75001

(877) 588-3330 Midland Office
3105 N. Big Spring St.
Midland, Texas 79705

1-877-588-3330 All Areas