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The RetireMentors

Retirement advice from experts in the business

March 2, 2016, 7:14 a.m. EST

Do you think you have enough money to retire?

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By Paul A. Merriman

About Paul

Paul Merriman is committed to educating people of all ages to get the most from their retirement investments. Founder of Merriman Wealth Management, a Seattle-based investment advisory firm, he is the author of numerous books on investing: "Financial Fitness Forever," "Live It Up Without Outliving Your Money," and the new "How To Invest" series, free at his website:  "How To Invest" series: "First Time Investor," "Get Smart or Get Screwed: How to Select the Best and Get the Most from Your Financial Advisor" and "101 Investment Decisions Guaranteed to Change Your Financial Future." In his retirement, Paul writes a weekly column at MarketWatch and continues his weekly podcast, Sound Investing, which was recognized by Money magazine as "the best Money Podcast in 2008". He is president of The Merriman Financial Education Foundation and all profits from the sale of his books are used to advance financial literacy. His recommendations for portfolios of Vanguard funds, Fidelity funds and ETFs, podcasts, articles and books are available at paulmerriman.com. Follow Paul on Twitter @SavvyInvestorPM.

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This is one of the most-often-asked questions posed by people in their 50s and 60s. There are simplistic answers (formulas, actually) that can tell you either "no way" or "maybe" or "for sure."

But you can't get much more precise than that without doing a bit of work and asking yourself some important questions.

One simple formula could be posed like this: Is your investment portfolio worth at least 25 times your current annual income? If the answer is yes, you're probably at least in the "maybe" category. If the answer is no, you might not be there yet.

Asking the right questions

The problem with such a simplistic formula is that it doesn't take into account all the things that make each of us unique. To get a really good answer, you should think about questions like these:

  • Is my current income enough to meet all my anticipated needs in retirement?

  • If I retire now, how many years do I need my investments to support me?

  • Am I comfortable planning to use up all my investments by the time of my death, or do I want to provide for others in my will?

  • Knowing that future investment returns are uncertain and could fall short of my expectations, am I willing to scale back my retirement lifestyle if necessary?

  • Can I reasonably count on being able to work part-time if necessary to make ends meet?

  • How anxious will I be if my retirement income varies from year to year depending on my investment returns?

That's a lot to think about, and we can't address it all at once. But we can start. I trust concepts more when I have numbers to back them up. And I have some useful tables of numbers that show hypothetical investment returns and withdrawal rates.

I suggest you refer to these tables as you go through this discussion in order to begin figuring out for yourself whether or not you have enough money to retire.

Making assumptions

Let's start with Table 2 , which is based on several important assumptions: It's 1970 and you have just retired with $1 million in your portfolio. You have properly diversified your portfolio to include much more than just the most popular asset classes. You will withdraw $40,000 in your first year of retirement (a 4% withdrawal rate, in other words), and you will increase that amount every year based on actual inflation.

The table has 12 columns of annual portfolio values. Since each year's distribution is "fixed" by the $40,000-plus inflation assumption, the only reason the columns have different numbers is that the portfolios are invested differently. On the left is a portfolio entirely in bond funds. On the right is one that's entirely in the S&P 500 Index. The portfolios in between are widely diversified in equity funds with varying percentages of stock funds and bond funds.

When you look at the bottom of the table you can instantly see that the yearly portfolio values dwindle and disappear in three of the 12 columns — those on the left with the lowest percentages of exposure to the stock market.

The blank white spaces at the bottom of those three columns indicate years in which our hypothetical investor ran out of money because the portfolio returns were insufficient to keep up with constantly rising withdrawals.

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