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12 numbers you need to know for retirement

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As a MarketWatch reader, you undoubtedly know much more than the average person about how to prepare for retirement. But knowledge, all by itself, doesn’t change anything. You have to take action.

If you’re organized about it, you can make a comprehensive action plan with only 12 numbers. These numbers represent the most important topics I would cover with you if we were having a one-to-one conversation on preparing for retirement.

I’ve covered this territory with thousands of investors over the years, and usually when they nail down these numbers, their circumstances suddenly become clearer. You’ll get the maximum benefit from this exercise if you revisit it from time to time as you get closer to retirement.

1. What is your current cost of living? Everything else in this exercise is based on this. I’m assuming you will want to continue something like your current lifestyle after you retire, so this won’t be too hard.

Start with your household’s gross income and subtract only the money you’re saving each year for your retirement.

2. What rate of inflation do you assume for the future? If you want your plans to mean anything, it’s vital to realize that inflation will be a big factor in future finances. As they say, $1 million just isn’t what it used to be.

For a ballpark figure, assume 3%-3.5% annual inflation.

3. How many years are left before you retire? This isn’t necessarily simple because many people experience a significant period of semi-retirement. And retirement is not always under your control. But unless you have at least a tentative plan, you won’t know whether you’re on track. For that, you have to pick a date.

4. In today’s dollars, how much will you need to live on every year after your retire? There are many moving parts to this — for instance where you’ll live and what you will want to do with your time. In general, I suggest that you start by potentially erring on the side of overestimation instead of the other way around.

Make your best estimate, obviously subject to future revisions.

5. What retirement income can you count on? This probably includes Social Security. If you’re lucky, it may include a pension and/or an annuity. If you own rental property that you intend to keep, it can include rental income.

This number should not include investment income you anticipate, such as interest, dividends or capital gains. We’ll account for that later.

6. How much annual retirement income will you need every year from your portfolio? This is simple math. You have determined (in step number four) how much you’ll need to live on. You know (from step number five) how much you can count on from external sources. Item number five is probably smaller than number four; the difference must come from somewhere else … most likely from your portfolio.

7. How big will your portfolio have to be when you retire? If your portfolio is properly balanced between diversified stock funds and bond funds, you can easily get a tentative answer to this question. Just multiply your answer from item number six by 25.

That implies that you’ll take out 4% of your investment balance each year. This might or might not be the right final answer for you, but it’s a good way to get yourself into the ballpark.

8. How much is your portfolio worth now? This should include stocks, bonds, mutual funds, IRAs, retirement accounts, cash, certificates of deposit and Treasury bills or bonds if you have them. Do not include real estate and other non-liquid assets unless you are going to sell them before you retire.

9. How much are you adding every year to your retirement savings? You should already know this from your very first calculation. This seems pretty simple, but you might be surprised how few people can tell you how much they’re putting away each year.

10. How much annual return do you need from your investments in order to reach your needed portfolio size when you plan to retire? To get this number, you’ll need a financial calculator or a computer spreadsheet.

Don’t skip this step. It’s a giant reality check to see if you’re on track to meet your retirement goal. If it turns out that you’ll need 3% or 4% a year, you’re in excellent shape. If it turns out that you need double-digit returns, you’ll know there’s some work to do. If you shoot for those higher returns, you will be taking an imprudent level of risk.

11. How is your portfolio allocated between stock funds and bond funds? Ideally your investments should include both. The ratio of stocks to bonds will determine the amount of risk you’re taking as well as your long-term expected return.

If your portfolio consists of stocks, bonds, ETFs and mutual funds, you can use the Portfolio X-Ray tool at to get this number. However, in order to get the most value from this answer, you may want to discuss it with a professional advisor.

12. How risky is your portfolio now? Your answer to Item number 11 plus some knowledge of historical returns will let you figure this out without too much trouble.

To show how important this is, let me give you just one example. If you have 80% of your portfolio in stock funds, you are exposed to the risk of losing nearly 43% of your portfolio in any given 12-month period.

Even exceptionally good investors and sensible people like you would have a hard time recovering from a loss that large.

If you’re taking too much risk, it’s good to find this out sooner rather than later so you can make the course correction before you find yourself in big trouble.

That’s a lot of territory, and we’ve covered it pretty quickly.

These 12 questions are discussed in more detail, along with suggestions for how to put this knowledge to work for you, in Chapter 10 of my book “Financial Fitness Forever.”

I would encourage you to read that full chapter, which is posted for free on my web site. The book itself is packed with information, insights and advice based on my many years of helping investors. I recommend it highly.

Richard Buck contributed to this article.