Retirement Planning

How Much Money Do You Need to Retire? – Part 2 of 2

When many of our clients are 5-10 years from retiring, they often ask us, “will I have enough money to live 

David Kenerson

David Kenerson

on during retirement?” Here are the steps we recommend to help you determine if you have saved enough cash to live comfortably when you step out of the work world.

We discussed the first step of this process here. Now, let’s walk through the final steps in this calculation.

 

Step 2 – Calculate the nominal amount you will need to cover your expenses.

  1. Determine when you will retire. How many more years will you be working?
  2. Assume a standard rate of inflation. We recommend using 3% annual inflation.
  3. Take your expected current dollar needs found in #1 above and compound this number by your selected inflation rate for the number of years until retirement.
    • (Multiply the net amount you calculated in Step 1 by 1 plus the inflation rate expressed as a decimal figure,
    • Take that answer and multiply it by the same amount again for each of required number of years until you retire(e.g. 106.09 x 1.03 = 109.270; $109.27 x 1.03 = etc.)

Example – You need $100 in today’s dollars 5 years from now. Your chosen inflation rate is 3%. The table below shows how many dollars will equal today’s $100 dollars at 3% inflation after each year:

Start End of Yr. 1 End of Yr. 2 End of Yr. 3 End of Yr. 4 End of Yr.5
$        100.00 $        103.00 $        106.09 $        109.27 $        112.55 $        115.93

 

This table tells us that in five years you will need a nominal amount of almost $116 for every $100 you spend today if the inflation rate runs at 3%.

Step 3 – Determine your Sources of income outside of your personal portfolio.

  1. Contact the Social Security Office and get an estimate of your social security payments at your expected retirement date.
  2. Contact any source of pension(s) to get an estimate of your pension at retirement.
  3. Note the amount of cash income you receive from any rental properties.
  4. Total your expected income for items 1-3.

Step 4 – Subtract your projected expenses at retirement from your Social Security, pension, and rental income at retirement.

  • If your total is positive, you don’t need to worry – your income is greater than your expenses. Congratulations!
  •  If your total is negative, your portfolios – IRA’s, 401k plans, profit-sharing plans, and portfolios held outright – must produce.
  •  Add up your total investment portfolios. If you earned 3%, 4%, or 5% on today’s portfolios, would any of these incomes be enough to offset the shortfall of social security, pension, and rental property income and cover your expenses? If they are sufficient then, again you probably are okay.
  • If your total is not sufficient to cover your expenses, you will need either to consider increasing your investment returns to such a rate that your portfolio (by your retirement date) will grow to a sufficient size to cover your expenses or plan to cut your expenses at retirement in such a way that the available income covers those expenses. Seeking higher returns implies taking greater risks: you will want to consult your investment advisor to determine whether obtaining such returns is feasible and most importantly can be done within your tolerance for risk!

Planning for your retirement future can be a daunting task, but if you follow these simple steps and plan accordingly, you can expect that your retirement years will be the most stress-free, relaxing, and fun years of your life.

If we can assist you with your retirement planning, please contact us at david at virginiaglobal.com or (757) 962-7976. 

 

European Finance

The United States of Europe: A Work in Progress

by David R. Kenerson, Jr. and Niklas K. Oskarsson

In 1993, when the European Union was formed between 12 countries, much was made of the possibility that the countries of Europe might become one unified government.  When – six years later – the Euro was introduced as common currency between 11 of those countries, those speculations gained new energy.

Now, Europe is working on centralizing the oversight of banking and the provision of a European wide guarantee of bank deposits, and institutions have been created to bail out governments that may suffer debt crises in the future. Thus, we – now in 2014 – see a gradual trend toward the creation of European-wide institutions that suggest ultimately the formation of a United States of Europe, a trend many people would say has been ongoing for over 20 years.

The Benefits and Challenges of the EU and the Euro

In forming the European Union, Europe agreed to facilitate cross border travel, employment, and transfer of goods. It also began setting common standards for construction and the manufacture of certain goods such as electrical equipment. As a result manufacturers could manufacture one version of a product instead of many.

Then, the formation of a currency union in the Euro reduced transaction costs from converting various currencies and simplified cross border accounting.

The strength of a country’s currency is a function primarily of four things:

·         its relative economic growth rate,

·         its relative inflation rate,

·         its financial soundness,

·         and its relative political stability when compared with other countries.

The Euro’s value is a balance between the values of the currencies of the “weaker currency countries” (e.g. Italy, Portugal, Greece, etc.) and the “stronger currency countries” (e.g. Germany and the Netherlands), and as such, it has had major benefits for all concerned: the weaker currency countries have had a stronger currency in the Euro – which has allowed them to import goods more cheaply than they could otherwise. It has also helped reduce inflation.

The stronger currency countries, who now have a “weaker currency” in the Euro, have also benefited from having more competitive exports from a price standpoint.  For example, Germany benefited significantly by it sales of equipment to Greece: German goods cost less than they would have (because most believe the Euro is “cheaper” than the old Deutschmark), and the Greeks could buy more than they otherwise had been able to do.

The disadvantage of the common currency is that the economies and cultures of the various countries vary greatly and labor flexibility differs widely. Therefore, some of the weaker currency countries can no longer compete effectively with Germany, for example.  However, in the Euro system, they are unable to devalue their currency in order to compete on a relative price/cost basis. Therefore, the market place can only express its dismay with the policies of a government by selling its country’s bonds – which we saw in the European debt crisis of 2010-2012.

Europe’s Response to the Challenges

To address these disadvantages, the European Union is taking steps –  centralizing banking oversight, providing a European wide guarantee of bank deposits, and the creation of bail-out systems to help governments in trouble.

These steps continue the gradual trend toward the creation and unification of European institutions that suggest ultimately the formation of a United States of Europe.

 

 

The information based here represents the judgments and opinions of the management of Virginia Global Asset Management and not intended as financial advice.