A simple tool for figuring retirement income

One of the biggest challenges facing baby boomers is deciding how to deploy your savings in retirement. You want to make sure your money lasts for the rest of your life, no matter how long you live, and no matter what happens in the economy. But that's not so easy, given all the things you need to take into account.

In addition, you have many approaches to generating a retirement paycheck, ranging from insuring your retirement by buying an annuity to self-insuring your retirement by investing your savings and adopting a systematic withdrawal method. These various methods each have their pros and cons, and produce different amounts of retirement income.

Learning how an actuary meets this challenge might help. It's like discovering what a credentialed nutritionist eats: You can learn a lot just by finding out what an expert does for himself or herself.

A good friend of mine -- Ken Steiner -- retired a few years ago from the prestigious actuarial and consulting firm Towers Watson, where he was in charge of the actuarial research department. Over the years, he gave a lot of thought to the challenge of generating a lifetime retirement income and came to the conclusion that regular folks could use the same methods that actuaries use to help large pension plans meet their financial obligations.

So, Steiner has developed a helpful website called How Much Can I Afford to Spend in Retirement? It contains a simple retirement income calculator, along with text that describes his approach, and it includes posts that provide more details on retirement income strategies.

His program is particularly helpful for people who want to self-insure their retirement by investing and drawing down their savings. It can also be used by people who use a hybrid approach -- buying an annuity with some of their savings, investing the remainder of their savings and using systematic withdrawals for generating a retirement paycheck.

At the heart of Steiner's method is a forecast of your future spending needs using carefully chosen assumptions about your future (more about these assumptions later). This forecast will help you develop an estimate of how much you can withdraw from your savings in the coming year. His program calculates this amount in such a way that if your assumptions exactly match your actual future experience, then your money will run out at the end of your (predicted) life.

But you can't count on your assumptions to exactly match what will happen in the future. Therefore, you should recalculate your withdrawal amount each year for the following year and, if necessary, make adjustments in your assumptions.

Most important, you'll update the amount that remains in your retirement savings, reflecting how your investments have performed in the prior year and the amounts that you've withdrawn.

Why should you adjust your withdrawal amount every year during your retirement? To make sure you're withdrawing enough to cover your expenses but are leaving enough to continue generating sufficient income to last throughout your retirement.

This constant recalculation of the withdrawal amount is one of the key advantages of Steiner's method because you continue to make adjustments to reflect actual events in your life and finances. When you think about it, you constantly make adjustments throughout your life as your circumstances change, so why should retirement be any different?

To use Steiner's method, you'll need to make a few key assumptions about your future:

  • How long you -- and your spouse or partner, if applicable -- will live. That is, how long you'll need retirement income.
  • The expected rate of return on your retirement savings, considering both appreciation and income.
  • Your expected inflation rate, or the percentage you need to increase your retirement income each year to cover the rising cost of your living expenses

To start, you'll need to input the current value of the money you'll use to generate a retirement paycheck. You can also input other sources of retirement income, such as Social Security and a pension or annuity, if you have one, to help determine your total retirement income budget. In addition, you can tell the program if you want to leave a legacy from your savings and reduce your withdrawal amount accordingly to plan for that possibility.

The assumptions you input into Steiner's program are critical: You can outlive your money if you're too optimistic about your investment return or if you live longer than your expected length of retirement. You can reduce the odds of outliving your money by being conservative with your choice of assumptions.

Steiner's most recent post, "Managing Your Spending in Retirement -- It's Not Rocket Science," assures people that they can indeed manage their savings in retirement if they spend some time initially learning about the issues involved and the methods available to them.

Once you've made this upfront investment of time, then each year thereafter when you're recalculating your withdrawal amount, Steiner says, "It will probably take you less time than you take to plan your next trip, fill out your NCAA tournament brackets or make your fantasy league picks."

Steiner originally developed his spreadsheet to figure out his own retirement, then he wanted to help others by sharing his tools and insights. He's not affiliated with any financial institution, so he has nothing to gain financially from his website. For people who want to take charge of their financial security in retirement, Steiner's site and tools are a great resource.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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