The Retirement Equation

Jon Ylinen

What to take into account when analyzing what you should be saving for retirement, and how to adjust if you're off target.

The single most common question from physicians at my talks and meetings is, “What should I be saving to retire comfortably at a similar lifestyle?”

There is no “one size fits all” answer to this question. A retirement analysis can be done by using an equation that must take into account the following variables:

1. Your (and your spouse’s) age

2. Amount added to retirement savings per month

3. Dollars needed (present value) for your monthly lifestyle

Source: Inflationdata.com

4. Potential inflation per year (3.43% per year on average —

5. Current retirement portfolio value

6. Potential rate of return

What you ultimately want is for the potential expected return on your current lump sum already saved for retirement combined with your monthly additions into retirement accounts to equal the present value of the lump sum needed to keep your current lifestyle with inflation up until (and beyond) your life expectancy.

A key error to avoid is to underestimate the power of inflation. For example, to replace a lifestyle of needing of $10,000/month in today’s dollars using an assumed compounded multiplier of 3.43% inflation rate, you will need the following amounts to have the same purchasing power:

$13,546/mo in 10 years

$18,979/mo in 20 years

$26,592/mo in 30 years

Take a good look at your budget and begin to map out an estimate of the expenses that will remain in your budget as you make the transition away from your career in medicine (Property taxes, insurance, groceries, utilities, etc), what expenses will leave the budget (Mortgage? Student loans? Kids? Saving for retirement, etc) and what additional expenses will be added (increased travel? More golf? Classes?). This will be a good amount to multiply out by an estimated inflation number to serve as a goal.

Like any equation, if you tweak just one variable you may have quite a different outcome. Also, since many variables are not guaranteed, actual results will generally differ; investing involves risk, returns will fluctuate and when redeemed may be worth more or less than originally invested. These analyses should be considered hypothetical examples only to illustrate possibilities to aid you in the development of your retirement strategy.

This may seem complicated, but most financial advisors should have a tool that they use to help narrow this down.

If you find that you are behind on your current retirement effort, you may need to do one or more of the following: increase your monthly savings, push back your retirement age, lower your lifestyle expectations for retirement or seek a higher rate of return on your invested assets. However, note that investments with higher rate of return potential will generally be accompanied by higher risk.

Due to the fluctuation of this equation, I suggest that this should be calculated at least once per year to make sure you are on track with your personal retirement goal.

Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax or legal advice. Please consult a tax or legal professional for information regarding your specific situation. 502476/DOFU 5-2012