--J.W., Kansas City, MO
A. You can see how long a given sum of money earning a fixed return will last, at any rate of withdrawal, using a simple financial calculator available at most office supply stores. I use a Texas Instruments Business Analyst II for most of the calculations used in this column. Mine is old enough to bring a collectibles premium on eBay, but you can buy a new one for less than $30. You can use the same calculator for figuring out mortgage and car loan payments because a consumer loan amounts to the same thing in reverse--- calculating how long it will take to recover a given amount of money from a series of fixed payments.
Planners start to wax eloquent because none of us is certain of having a fixed rate of return over the course of a long retirement. That's why I've put so much information on my website about "portfolio survival" at different rates of withdrawal. It's distressing, but uneven rates of return mean we can only have probable withdrawal rates.
Another way to approach this involves using a spreadsheet and calculating your anticipated income needs, adjusted upward for inflation, for the remainder of your life. Then you take the present value--- discounting the future sum for the rate of return you can earn over each time period--- of all the years of expenditures.
When you assume an interest rate of about 6.0 percent for the first ten years and 10 percent for each year thereafter, you can finance 40 years of retirement with living expenses rising 3 percent a year with about 17 years of your initial income in an investment fund.
Q. My wife and I currently have an income of around $165,000 ($100,000 hers and $65,000 mine), and are both 29 years old. We have about $10,000 in credit card debt, a car payment of $650 a month, and a house payment of $2,150 per month. My wife is pregnant with our first child, we would like to ease her out of working but still save for the future. We have about $10,000 in IRAs and are currently making annual contributions totaling about $14,500 a year to qualified plans.
I own a business and am confident I will be able to increase my salary next year to about $80,000 a year. I estimate we will have our credit cards completely paid off by February or March. After that point, if she is still working at the current salary, we will have about $3,000 of after-tax monthly income to save. What would you recommend for a short term and long term plan?
---C.P., by e-mail
A. If I could attach an alarm bell to this response, I would. You need to do some serious cash flow planning when you face an income reduction of 50 percent.
While many people would like to have an income of $80,000, let alone $165,000, the important fact here is that your house and car payments, alone, absorb $33,600 a year or 42 percent of your expected $80,000 income. If you also take out Social Security, virtually fixed payments for operating your house and car, and then add the new expenses of a child and you're heading for a real cash crunch.
Bottom line: the pressing issue isn't short and long term plans, it's building as much of a cash cushion as fast as you can to ease the transition. You'll make it--- most people make it on a lot less--- but you're going to have to watch the money closely.
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