Contemplating retirement financial needs.

• Author: Nelson, Terry N.

There are unique issues affecting individuals contemplating retirement and trying to determine if they have sufficient assets to do so. For this group, there are at least four financial assumptions that may lead to overestimating eventual financial needs.

Assumption 1: Only Income Can Be Consumed

Most retirement planning revolves around accumulating an asset and having this asset create retirement income used to replace employment income (never invading the principal). Under this assumption, in essence, the principle portion of a retirement account has been earmarked for the benefit of children, or other beneficiaries, or both. However, if a retirement account has been created solely for an individual's personal retirement needs, invasion of the principal is acceptable. For example, if an individual had a retirement account of $1 million with a 10% investment return and a $120,000 annual withdrawal, this asset would last about 20 years. Therefore, assuming that a future retiree can never invade principal will cause retirement needs to be overstated.

Assumption 2: 80% to 100% of Preretirement Income Needed

In planning for retirement, one of the first questions is what percentage of income a future retiree will need in retirement relative to preretirement income. Answers typically range from 80% to in excess of 100%. While this may be true (depending on an individual's goals and plans), as an overall percentage 80%-100% may be unnecessarily high. There are numerous expenditures that occur during the employment years that will not be present in most retirement situations, such as:

* Payment of debt obligations;

* Children expenses;

* Annual savings; and

* Contributing to retirement accounts.

Many people overlook the nonliving cash outlays when comparing current income levels to retirement income needs. Retirees are generally surprised and shocked by how little it takes to live during their retirement years. Future retirees should review their actual cash outlays for current living expenses; this can be a truer reflection of their anticipated needs than starting with today's total gross income and simply applying an applicable...