<p>There are a number of interrelated questions in retirement planning:</p>
<p>1) What will your expenses be in retirement?
2) What kind of rate of return can you expect / investment strategy should you pursue while saving for retirement?
3) How much money can you take from your retirement savings while in retirement?
4) What investment strategy should you pursue in retirement.</p>
<p>There are a number of tools I’ve found to examine these questions, but many of them make simplistic assumptions.</p>
<p>1) Many retirement calculators ask your current income and then plug in 75 or 80% of your current income as your expenses during retirement. This may be much too high or much too low. Most serious retirement planning will require you to make a real budget of your likely expenses, making sure to make adequate room in your budget for health care expenses. The 75 to 80% rule of thumb is from surveys, which show that many retirees spend that much - but this is probably because that’s what they have available to spend, not necessarily because that’s how much they would like to have available.</p>
<p>If you are in a high tax bracket today and saving madly for retirement and spending money out of income for college tuition, your expenses may fall significantly on retirement. On the other hand, many people would like to travel or do other recreational activities in retirement which cost money, especially in the early years. Many retirement counselors characterize retirement in 3 phases: the go-go years, the slow-go years, and the no-go years.</p>
<p>2) Many retirement calculators compute an expected return on your investments while saving for retirement, based on a portfolio allocation. This may or may not be an accurate estimate of an average expected return, but the return you achieve will probably not be average, and will have ups and downs with the market. In my view, Financial Engines does a good job, using Monte Carlo simulations, of telling you the probability of your reaching your retirement goal. The basic message is to beware of a calculator which gives you a single number as the rate of return, or how much you need to save, to reach your retirement savings goal.</p>
<p>3) How much can you take from your savings while you are in retirement? In the good old days, people had social security and a pension. This gave them a reliable monthly income - an annuity. If you have retirement savings you need to drawn upon for living expenses you need to know how much you can take from your savings on a sustainable basis.</p>
<p>One method is to purchase an immediate annuity when you retire. This will give you a monthly (or quarterly, etc.) income as long as you live. This is the method that Financial Engines uses to see if you will have enough money saved for retirement. That is, you specify what income you need and Financial Engines calculates the chances that you will have enough money in savings to purchase an immediate annuity that pays you the income you need on the date of your retirement.</p>
<p>This is extreme for most people. If you use all your savings to purchase an immediate annuity you will have no savings for emergencies, big purchases, etc. and there will be no money for bequests - something many people want to leave. One recommended strategy is to purchase some immediate annuities, but not put all your savings in that vehicle. The downside today is that annuities pay out based on long-term interest rates, which are very low today on a historical basis. So you won’t get that much income from an annuity for a given purchase price.</p>
<p>With an annuity you don’t have to worry about outliving your retirement savings. Living off of withdrawals from you retirement savings means you risk running out of money if you spend too much or your investments perform poorly. There is some long-standing research, embodied in the 4% rule of thumb, which says that if you withdraw 4% of your retirement savings in the first year of retirement and increase your withdrawals by the rate of inflation for every year thereafter, you have something like a 90% chance of being able to finance a 30 year retirement, given a moderate investment allocation of perhaps 50% equity, 50% bonds.</p>
<p>The trouble is that this research was conducted over a period when bond interest rates were significantly higher. Many financial advisors are worried that the 4% rule of thumb may be too high given today’s interest situation. There are a number of modifications you can make to the 4% rule of thumb to make it more likely that your money will last the rest of your life.</p>
<p>4) What should your investment strategy be during retirement? What kind of rate of return can you expect? What should be your withdrawal strategy from various classes of accounts - Roth, IRAs, 401ks? When should you claim Social Security? These are all important questions and probably need input from a financial consultant. There are calculators that can help with each of these questions - for example there are a number of on-line calculators that can help you figure out when and how to claim your Social Security benefits.</p>
<p>In my view these are serious questions (1-4 above) which require serious thought. If you are comfortable with finance and experienced in managing your assets you may well be able to do it yourself, but you will need to search out specialized tools for each of these questions, in my view. If you have significant assets I think it could easily be worth while getting some sort of professional advice, especially if one partner is much more experienced than the other - how will assets be managed if the more experienced partner dies first?</p>
<p>Here’s another resource / calculator I’ve found useful:</p>
<p>[Analyze</a> Now](<a href=“http://www.analyzenow.com/]Analyze”>http://www.analyzenow.com/)</p>
<p>It’s one of the sites recommended by Consumer Reports in a story from 2011. They also liked the AARP on-line tools and the TRowe Price on-line calculators.</p>