The Results of Bob and Betty’s Checkup
Recall that they need $25,000 to meet their basic needs. Bob’s pension guarantees them $6,800 using a 100% joint and survivor option. However, since it is not indexed for inflation, its value must be recognized as only $5,800. Using the assumptions noted above, the income-producing assets needed at age 65 for the two different lifestyles are:
- “Have-to-have” – $25,000 – $5,800 = $19,200 requires $376,328
- “Comfortable” – $50,000 – $5,800 = $44,200 requires $866,339
Translating a lump sum into a monthly income requires skill, just as removing an appendix does. When working with a financial advisor, make sure you understand every assumption used in calculating this figure, and err on the conservative side. Better to have a little extra.
Bob and Betty knew that these numbers were assumptions. It is up to them to save and invest accordingly in order to realize their goals. But it is also imperative that they not fall prey to emotional investment decisions. Common mistakes like being out of the market when a rebound follows a decline, chasing the performance of an asset class that topped the field last period, or failing to rebalance their portfolio could all defeat their goals. A team of skilled, independent financial advisors, however, can go a long way toward keeping them on track.
Let’s see how they are doing so far by calculating their funded ratios.
If their $265,000 portfolio grows as assumed, this will give them $412,861. Their annual investments of $6,000 a year will add $114,941, so their total projected assets at age 65 are $527,802. Bob and Betty are projected to be okay for their “have-to-have” retirement income, as their funded ratio is a bit over 140%.
But their funded ratio for the comfortable retirement lifestyle is 61%, so they are not on track for that level. They are short $388,537. Recall that eating out one fewer night per week and investing that money increased their total by $53,640. That one commitment would make up approximately 14% of the gap and raise their funded ratio to 67%.
Even if they were okay today, they cannot sit back and neglect their financial health. Periodic medical and financial checkups are good for us. The good and bad news for Bob and Betty is that they are on track for their “have-to-have” retirement, but will need to take corrective actions if they want to retire at age 65 in the style they really want.