Retirement Planning With Just 3 Numbers

Piggy Bank with retirement formula
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By Robert Berger

Professionals love complications. Trust me. I'm a lawyer. I know. We love using fancy words and really long sentences. Uttering something in Latin is even better. "Nunc pro tunc" is my personal favorite because it makes me feel like a time traveler.

Retirement planning should not be so complicated. We can put away the Monte Carlo simulators and fancy calculators. We don't need a thick, smartly-bound plan from a financial adviser. In fact, all we really need to understand are these three numbers:

25. How big of a nest egg do you need for retirement? While that may seem like a complicated question, it's not. Take your anticipated annual expenses during retirement (some use their current income as a proxy), subtract your expected Social Security and pension benefits and then multiply by 25.

For example, let's assume you'll need $75,000 a year in retirement and you'll receive $25,000 a year in Social Security and pension benefits. Your nest egg needs to be $1.25 million ($50,000 x 25).

The logic behind the number 25 is simple. It assumes that a retiree can withdrawal 4 percent of his or her investments each year without substantial risk of running out of money. %VIRTUAL-article-sponsoredlinks%Did you see what I did there? I snuck in the word "substantial" just before "risk." Yes, it's a lawyer trick designed to give us an out. But it's important. There are no guarantees here. But a 4 percent withdraw rate is a safe bet, according to the experts.

15. Saving 25 times your annual expenses is a big number. If you are decades from retirement, it's fair to ask just how much you need to save to meet this goal. The answer depends on how fast you want to get there. However, as a general rule of thumb, saving 15 percent of your income should get the job done.

If you start much later in life, you'll need to save much more. If you want to retire early, you may need to save a lot more than 15 percent. A good resource to see exactly where you stand is called "Your Money Ratios." Written by Charles Farrell, this book will give you a good idea if you are on the right track given your age, income and retirement savings.

Your age. We need to have an estimate of the returns we can expect to receive on our investments. I use 8 percent for planning purposes. So you are probably wondering why the third number isn't eight.

Here's why:

In order to earn 8 percent on average, it's critical to have the right mix of investments. Play it too "safe" with lots of fixed-income securities, and it's less likely that you can meet your retirement savings goals. On the other hand, putting everything into emerging market debt is likely to give even the most aggressive investor motion sickness.

As a good rule of thumb, you can use your age to devise a solid investment plan. Simply subtract your age from 100 and invest that percentage of your assets in equities, with the rest in bonds. For example, at 20 you would invest 80 percent in stocks and 20 percent in bonds. At age 50 it would be an even split. Some investors get a bit more aggressive and subtract their age from 120 instead of 100. That tilts the scale in favor of more equities, but is still a good rule of thumb.

Whatever choices you make, just remember that starting early is the "sine qua non," or essential ingredient, of a worry-free retirement.

Rob Berger is an attorney and founder of the popular personal finance and investing blog, He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing.

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Retirement Planning With Just 3 Numbers
For years, security professionals have emphasized the importance of shredding your personal documents before you throw them out. But Holland notes that shredding isn't as much of a priority as it used to be. "There aren't nearly as many documents with personal information out there as there were even just two years ago," he explains. "These days, it's much easier to get your information off your computer."

Passwords are your first line of defense against intruders. But, as Holland points out, even the most careful people sometimes have password breaches. "I've helped chief privacy officers from health care and security firms," he notes. "If they're getting hit, then anyone is vulnerable." While Holland notes the importance of having a good password, he emphasizes that the most important thing is paying attention to password breach notifications. If you hear that one of your passwords may have been breached, he counsels, change it immediately. And, because many of your accounts may be linked, he notes, it's not a bad idea to change the rest of your passwords as well.

One piece of advice that you don't often hear is to keep on top of software updates. But, Holland argues, updating your operating system, your software, and your security programs is one of the easiest and most important ways to ensure your security. Software companies spend a lot of time and money trying to stay ahead of online intruders -- it only makes sense to take advantage of their work.
Even if you are convinced that your security is state-of-the-art and your password is unbreakable, it never hurts to double-check your most sensitive accounts. Holland suggests regularly checking your bank and credit card statements to ensure that there aren't any inappropriate charges on your accounts. As a side benefit, this is also a great way to catch any unexpected fees that your bank may try to spring on you.
When a breach happens, a fast response can mean the difference between a minor annoyance and a major pain in the neck. With that in mind, Holland suggests talking to your bank about having transaction alerts placed on your account. Every time your account is credited with a transaction over a particular amount -- $50, for example -- your bank will send you an e-mail or text notification. If it's an expected transaction, you can discard the message; if not, you'll be able to respond immediately.
Every year, you are entitled to a free credit report from each of the reporting bureaus. Holland suggests taking advantage of this free service, noting that your credit report is a great way to track your outstanding debts and ensure that nobody is trying to open false accounts in your name. He emphasizes, however, that the best way to get your free report is by going to, not "That site's a scam," he laughs.
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