Broker Check

Planning Your Retirement Dream Without a Pension? Five Things You Must Do.

April 02, 2018

Are you planning the retirement of your dreams or are you just dreaming about retirement? If you are just dreaming, you had better get started planning. As the saying goes, "you get the retirement you can afford not necessarily the one you dream about." Your retirement will probably be the most expensive thing you ever buy. In case you haven't noticed, fully funded, corporate pensions, once the backbone of retirement planning, are rapidly disappearing. They are being replaced by so called, "do-it-yourself", retirement plans such as the 401(k), 403(b), and others. These "Do-it-yourself" plans require you, the future retiree, to think, plan, and execute your own personal retirement strategy. For many of us, with little or no training in the principles of managing a long-term saving and investing program, that is a difficult undertaking. Be that as it may, the retirement ball is now in our hands and we have to run with it. The earlier you start planning the better prepared you will be. How do we get started?

In order to get started planning the retirement of your dreams, there are five things you must do right now:

Step 1. Choose the year you would like to retire. That is the year you will stop receiving a salary and will generally begin receiving income from a combination of corporate pension payments, Social Security retirement benefits, and your retirement savings. Note: for most of us, corporate pension payments will not be available to help fund our retirements.

Step 2. Project your retirement income needs based on the retirement life style you want to enjoy. The easiest way to do that is to estimate the percentage of your current income you would need if retiring today. Most experts suggest you will need between 60 and 90% of your current gross income. You must then inflate that income to your retirement date using an inflation rate that closely represents your expected rate of salary increases between now and retirement. For example: I plan to retire in 10 years. I expect my salary to increase at an average rate of 3% per year. If I retired today, I would need 70% of my current gross income of $200,000 per year which equals $140,000. In 10 years that number would grow to $188,148. That is how much income I would theoretically need in my first year of retirement. That amount must grow every year at the inflation rate throughout my retirement.

Step 3. Determine your expected Social Security and company pension payments. Review your employee benefits statement(s) to determine the amount, if any, of income you can expect to receive from your corporate pension plan. Don't forget to include vested amounts due from past employers. Be sure to include only the pension benefits that are vested to you. You can determine the amount of your expected Social Security retirement benefits by going to the Social Security website at

Step 4. (Using the information gained from steps 1 through 3) Calculate the amount of assets required to fund the portion of your retirement income needs not covered by Social Security or company pension payments. It is important to make your calculations using the following three models: Aggressive, Moderate, and Conservative. Let's take a moment to review each model.

The Aggressive Model, also known as the Annuity Model, is the simplest and least expensive model in terms of calculation and required assets. It assumes you will have only enough assets to last until your life expectancy. We usually estimate life expectancy as being somewhere between the ages of 85 and 95. Think of this model as a rising income, life annuity. For example: Let's consider an expected 25 year retirement period, with a 3% annual inflation rate, an expected average annual return of 5% on invested balances, and a first year income requirement of $100,000.00. Based on this model, that income must be increased by a rate of 3% each year of retirement. The amount of assets required to fund that rising level of income at retirement would be $2,000,000. At life expectancy there would be no assets remaining. This should be considered your minimum level of assets required for retirement.

The Moderate Model, also known as the Capital Preservation Model, is more expensive in terms of the amount of assets required to fund a given retirement. It assumes the same amount of assets required by the Aggressive Model previously mentioned, plus an extra amount of assets to invest at retirement so that at life expectancy you will have the same amount of assets you started with. For example: Suppose the Aggressive Model requires you to have $2 million in savings in order to fund a retirement that will last 25 years, the Moderate Model would require an additional $292,000.00 in assets at retirement. This extra amount, if invested at an 8% annual return during the retirement years, would eventually grow to $2 million at life expectancy. Therefore, the total amount of assets required by this model at retirement would be $2,292,000.00.

The Conservative Model, also known as the Purchasing Power Preservation Model, is the most expensive in terms of required savings. Again it assumes the same amount of assets required in the Aggressive Model plus an additional amount of assets that will grow to the inflation adjusted, equivalent of the assets required by the Aggressive Model at life expectancy. For example: Let's again assume that the Aggressive Model requires $2 million of assets to fund a retirement expected to last 25 years. If inflation is expected to average 3% per year during that period, the inflation adjusted, equivalent of the $2 million at life expectancy would be $4.2 million. In order to have that amount at life expectancy, assuming an 8% annual return during retirement, would require an additional $617,000.00 at retirement. Therefore, the total amount of assets required by this model at retirement would be $2,617,000.00.

After calculating the asset requirements of these respective models, the indications are that the amount of assets required to fund this theoretical retirement would be somewhere between $2 million and $2.6 million. While the Moderate and Conservative Models are more expensive in term of savings required, they do provide an important cushion just in case you live longer than planned, or spend more money than planned during retirement. Please keep in mind that a lot of things can happen during a 25 year retirement period. Having an adequate cushion will be critically important. Therefore, it is prudent to run these models several times using varying time, return, and inflation assumptions to get a more comprehensive range of possibilities. You should thoroughly review all three models to select the savings goal that is most appropriate for you.

Step 5. Calculate your required savings rate during the asset accumulation period. Asset accumulation is a synthesis of saving, investing, and time. These are the key variables. You must effectively blend all three to accumulate the level of assets you will need at retirement. The ultimate goal of this step is to determine the amount of money you must save on a regular basis, the required savings rate, to eventually accumulate the amount of assets (indicated by step four) that will reliably fund your retirement years. The required savings rate is calculated by using a time value of money formula which considers years remaining before retirement, expected return from your investments during the accumulation period, and the level of assets required at retirement. Let's look at an example. Suppose I chose the moderate model in step four which requires me to accumulate $2,292,000 in assets by retirement. Let's also suppose retirement is 20 years away, my target annual return on my investments during the accumulation period is 8%, and I presently have $200,000 in assets in my 401(k). Based on those assumptions, my savings rate would be approximately $29,714.82 per year or $2,476.23 per month. Accuracy is a critical factor in these calculations. Therefore, you must carefully consider your estimates.

I realize that for most people saving $29,714.82 per year is a difficult thing to do. As I said earlier, accumulating assets is a synthesis of time, savings, and return on investments, as such; raising any one of those variables will lower the other two. For example, extending the accumulation period will lower the required savings. Raising the expected investment return, will also lower the savings requirement. Therefore, by changing the variables you can perform your own "what if" analysis. You must however, resist the temptation to make unrealistic assumptions especially, investment return assumptions. Unrealistic assumptions will serve to make your plan unworkable. Overly aggressive investment practices in your 401(k) can actually subject your retirement dream to undue risk. Prudent plans rely more on savings rate and time rather than outsized investment returns. Time is particularly effective variable to change in order to lower the required savings rate. By extending the time before retirement you make the asset accumulation phase longer and the distribution phase shorter; in other words, more time to save and less time to spend.

Now that we have covered the five things you must do today to start planning the retirement of your dreams, let's review the steps in order:

Choose the year you would like to retire.

Project your retirement income needs based on the retirement life style you want.

Determine your expected Social Security and company pension payments.

Calculate the amount of assets you will need at retirement using the aggressive, moderate, and conservative models.

Calculate your required rate of savings.

By accurately completing these five steps, you will have a clear idea of how much you will need to save for retirement on a regular basis. This process will help you understand how various levels of inflation and investment return expectations will vary the projections. As I have previously mentioned, retirement is expensive. For most of us the only way to accumulate the level of savings our retirement dreams require is to think, plan, and then execute our personal retirement strategy as early as possible. This will necessarily require you to stop dreaming about tomorrow and get started planning today.

Call me if I can help.

"Enjoy life and build can do both. I'm Keith Donnell your Certified Financial Planner Professional."

Keith Donnell is a Certified Financial Planner Professional with 25 years of experience helping people plan for major life events such as paying for college, providing for a child with special needs, retirement planning, retirement income planning, estate planning, and more. He can be reached at