This chapter is considerably different from most magazines and texts. Many books, magazine and articles comment upon the amount of equities one should take at any age. If you are, for example, 35 years of age, the amount of equities they might suggest you take is 100% minus your age; if your 65 maybe it's 100% minus 65% or just 35% in equities or whatever. While it's most times true that you tend to reduce risk as you get older, the use of simplified "rule of thumb" guidelines are usually not worth the nail polish. They do not take into account all the various concerns and problems about YOU, personally. Sure, they may work 50% to 65% of the time, what happens if you are in the other 35% to 50% arena and should do something entirely different? You can't go along with the crowd and then find out you should have done something different when you turn 75. It's too late to make adjustments if you are shown to be short of money.

Others suggest you take their quizzes and fill out numerous forms that will supposedly signify whether you're a risk taker, very conservative, middle of the road, etc. But these quizzes are usually sophomoric and don't really tell you what you need to know- mainly what you would like to do or.




Financial Planning, when done right by someone with experience and KNOWLEDGE, encompasses far more than the simplistic approaches that novice magazine writers have in the business.

As an instructor in financial planning at universities and in practice with clients, I have consistently found that few families have ever done a proper budget analysis for retirement, education funding or most else. The point being is this- while at certain ages you may want to devote more investment sums to GIC's and lower returning investments- particularly if you are conservative or scared of the market- the numbers may simply not compute when considering a normal average retirement lifestyle and an average actuarial lifetime. (Men should plan on living to their late 70's; women to the mid 80's. Couples should plan on 80 to 82 for an average healthy couple- adjust for lifestyle, health, lineage, etc. Even then, you may want to budget till 85 to be more conservative. The most recent numbers I have seen (November 1996) show that a male age 65 can expect an actuarial lifetime of 80.5 years of age. A woman to 83.8. Plan accordingly in conjunction with your health and lifestyle.

By the same token, one does not necessarily need to spend much time filling out the various forms and market studies (listed as a "special" article in every major finance magazine about twice per year) indicating your supposed risk level and acceptance. Who cares if you show nil risk acceptance when the real issues are that you need to save more aggressively for your retirement, your kid's education, your parents nursing home care, etc., etc. If you have all the money in the world, no problem. Bill Gates can be a conservative investor. Oprah Winfrey can be a conservative investor. Ted Turner can be a conservative investors (unless he keeps giving away $50,000,000 consulting fees to the likes of Mike Milken). Donald Trump can be a conservative investor (but he'd still be a schmuck.) Sylvester (Why can't I find a nice girl?) Stallone can be a conservative investor. But for the rest of us working stiffs, what we need to accomplish will determine what we need to do in the marketplace and the risks necessary to meet those obligation. It's either that or reduce the goals. So, it's not what you'd necessarily like to do. It's what you NEED to do. The issue for proper planning is whether or not you will have enough money to accomplish the goals you have established or should have established.

Another problem with innumerable magazine articles is that the figures to use for determining current and budget retirements. Many articles state that your retirement budget will be anywhere from 60 to 80% of current spending (real range is usually from 50% to 90%). Some suggest that if you are "unsure", use 70% as a general gauge. Wrong, Wrong, Wrong! Let's say you had a current after tax budget of $40,000, took 70% for retirement and were 65 years of age. Projecting an income need with a 3.5% inflation factor and a 6% return on invested monies to age 80 (fifteen years), you'd need to have roughly $365,000 in a kitty today (numbers explained later). If, however, the correct amount was 80% of current budget, the amount necessary to fund the same lifetime with $32,000 spending per year would be $421,000. That's a $56,000 difference. If you actually needed that amount of money, you don't want to find out at age 73. Too late to make up the difference.

Living the last few years of your life in financial destitution and emotional turmoil, simply because you didn't budget properly, is a lousy way to end a life.

So, first things first. The budget shown elsewhere is one of the most complete anywhere. Previous seminar participants have added various items that may be unique to their environment- water wells, snow removal, etc. Hopefully you will note the inclusion of certain areas that are missing from most budget forms- pets and veterinarian fees for example. Many elderly have pets- or should have them- but these fees can add up to significant sums over time. (If you have others to add, please send to 2295 W. Ave. 133, San Leandro, CA 94577). This lengthy budget will take sometime to complete but it's mandatory to know this at almost every stage of your life. It avoids overspending and focuses on investing properly, etc. Notice that if you pay some bills annually, you may have to review your check stubs to be sure you have accumulated all your expenses. We have also included a line item for 5% to 10% miscellaneous. There always seems to be some item that has been overlooked.

IMPORTANT: Look at the last line of the budget. Make sure that you subtract your federal and state tax to get the after tax budget. This will be used to compute the money you need for retirement. Yes, obviously taxes will need to be computed for retirement, but they are computed separately at that time.


Let's take a woman age 45 who has completed the above budget analysis. She currently spends $45,000 per year but that includes $8,000 in taxes. Current after tax budget is therefore $37,000 per year. She wishes to know how much she needs to have in a "kitty" at a proposed retirement age of 65. She expects to live to 85. Before the numbers are crunched however, Mary recognizes that she will not spend as much, hopefully, after retirement as she does before. Quickly looking at her spending habits, she decides she would need maybe $31,500.

Since she already has a formal budget done, the first thing is to determine how big that budget will grow to by the age of 64- twenty more years. For this next step, you need to select an appropriate inflation rate for that period of time. You also need to select one during retirement- they don't need to be the same. But, overall, the easiest thing to do might be to project a realistic inflation rate- say 3.5 or 4.5% and then add a slight kicker. We will use 5%. If you are too low, then a slight increase in inflation will not leave you enough money. If you pick too high- say 7%- you'll have to put away a very large chunk of money and may not have enough to fulfill needs today.

On page is Schedule , Future value of $1.00. Review the schedule to see how it works- fairly simple. Anyway, our example has a current after tax budget of $37,000. If this budget stayed constant with inflation, the money needed in 20 years would be $31,500 times 2.65 (5% column, 20 years) would be $83,500. Yes, that figure is correct- at least as far as inflation is concerned. IF everything she purchased each year was impacted by the same rate of inflation, she'd need $83,500 to buy those same items. In reality, not all items go up each year, nor necessarily by the inflation rate. But for this purpose, $83,500 is what she would need.

A. Retirement Budget _______________

B. Minus Taxes _______________

C. After Tax Budget _______________

D. Inflation rate _______________

E. Number of Years to Retirement ________________

F. Factor from Schedule _________________

G. Multiply C by F ________________ This is what the current after tax budget would actually be E years at the inflation rate selected.

The issue for our discussion is how much of "kitty" would one need at retirement in order to pay out $83,500 each year if it also increased at the inflation rate of 4%. Here's what we did: we DID say inflation was 5%. But, clearly, during retirement, retirees are not purchasing all the same inflationary items (houses, cars, furniture, etc.) and are rarely impacted the same way as younger workers, so we dropped the retirement inflation to 4%. We believe that is realistic, but if you don't like that philosophy, use what you feel comfortable with. At the same time however, our kitty would be earning money at some investment rate. Admittedly, the return tends to be less than that during the working years due to more conservative investments (does not have to be, but used for example). Assuming a 10% before tax return (because it's in tax sheltered accounts) during working years is reduced to a 6% after tax return during retirement, this works out to $1,359,000. EGADS!!!


Recognize that we have not said that you needed any extra money for college, payment for other loans, monies to take care of elderly parents or any other emergency. This is just the money you budgeted for retirement at $31,500 in today's dollars.

So where will all this money come from?. Well, part will come from Social Security payment s in the future. But we won't even include these in our subsequent analysis. Some say it won't even be there but we'll leave that discussion for another time.

And we are not going to say she has a separate pension plan.

So she is going to have to earn it all by herself primarily with the 401 (k). Being a conservative investor using low risks investments? Probably not, as we shall see. The review will cover not what you would like to do, but what you will need to do to accomplish your goals.

Let's go to work and solve this problem.

The next set of numbers is on page . for our example, we shall assume that Mary earns $45,000. Her employer is matching the first 3%. We will first use a conservative portfolio earning 7% before tax (remember that a 401(k) plan is tax sheltered. No taxes are incurred until the money is drawn out later- preferably at retirement). We must also consider that Mary will be getting a salary increases. We shall simply say that they match the cost of living projected above- we said 5%.

1. Present Age

2. Age at Retirement

3. Years of Accumulation

4. Estimated return, before tax

5. Current Salary

6. Yearly increase in salary anticipated

The calculations will first determine how much a 1% salary contribution would be and then multiply it by various reductions that Mary could utilize. Use Compound Interest Form on Page

Line 4 7% x Line 3 20 = Factor E 3.87

Line 6 5% x Line 3 20 = Factor F 2.65

Line 4 7 minus Line 6 5 divided by 100 = Factor G .02

By using these numbers, we can determine how much 1% of Mary's salary would be worth in 20 years tax sheltered.

Factor E 3.87 minus Factor F 2.65 = 1.22 divided by Factor G .02= 61

7. Times 1% of Mary's salary $450 = $27,450

8. Percentage that Mary contributes 6%

9. Company match (First 3%) 3%

10. Total 9%

11. Multiply line 7 $27,450 times Line 9 (use whole number, not percentage) 9 =

12. $247,050

13. Now since Mary has worked for the company for the past 10 years. She already has saved in her 401(k) plan $50,000. At 7% growth, this would grow to $193,484

Total by age 65= $440,534

Well, that's not going to cut it. Being a conservative investor using GIC's at 7% will not even get close to Mary's requirements. She may NOT LIKE to be involved with investing. She may WANT to be conservative. But she NEEDS to make more money.

If we went through he same exercise at a 10% return on investments during the growth period,

Line 4 10% x Line 3 20 = Factor E 6.73

Line 6 5% x Line 3 20 = Factor F 2.65

Line 4 10 minus Line 6 5 divided by 100 = Factor G .05

By using these numbers, we can determine how much 1% of Mary's salary would be worth in 20 years tax sheltered.

Factor E 6.73 minus Factor F 2.65 = 4.08 divided by Factor G .05= 81.60

7. Times 1% of Mary's salary $450 = $36,720

8. Percentage that Mary contributes 6%

9. Company match (First 3%) 3%

10. Total 9%

11. Multiply line 7 $36,720 times Line 9 (use whole number, not percentage) 9 =

12. $330,480

13. Now since Mary has worked for the company for the past 10 years. She already has saved in her 401(k) plan $50,000. At 10% growth, this would growth to $336,375

Total 401(k) now is $666,855. That's $226,321 more money before tax.

But there's not a chance she'll make her requirements on her current course. So here's what we do. The 401(k) remains the same, EXCEPT that we increase it to 10% participation per year.

8. Percentage that Mary contributes 10%

9. Company match (First 3%) 3%

10. Total 13%

11. Multiply line 7 $36,720 times Line 9 (use whole number, not percentage) 13 =

12. $477,360

13. Add $336,375 already in kitty

Total now $813,735. Subtract 13% for taxes as though a lump sum withdrawal and this leaves $708,000

The REAL key to her success, and in countless client surveys is the determining factor to retirement success, is a manipulation of the budget. Getting a really fine line analysis can SUCCESSFULLY determine how Mary can succeed.

In a review of her budget, Mary easily sees how her retirement budget, IN TODAY's DOLLARS, did not need to be $37,000. She could live comfortably on $28,000. By repeating the process above using a 5% inflation, the budget at age 65 would be$74,292.

Next, Mary has determined she must be an astute investor AFTER she retires as well as before. After all, one has more time to review investments when retired than before. She estimates that her return can be 7% after tax rather than the 6% previously selected. Her needs for the 20 years of retirement are now calculated to be


O.K., we still didn't make it, but instead of being $918,466 off, we are now only $409,050 in difference. By doing a little e homework, we decreased a real problem by $615,200.

So is Mary completely out of luck? Not yet. Proper planning and a recognition of necessities can make up the offset.

How about a part time job after she retires. Let's say she could earn $10,000 (today's dollars) after tax per year until age 70. (That's $25,000, rounded, in future dollars in 20 years at a 5% increase) After all, Mary always said she go bonkers if she didn't stay active. With these numbers, her needs for retirement drop the first five years and overall now amount to only, roughly $864,140 for the total 20 years of retirement.

She had a "kitty" of $813,735. by working five years part time after retirement. The difference is now $50,000 rounded. What are the issues to consider now. Dying early- admittedly not a tremendously viable option. Tweaking the budget a little bit more by buying a car every six years instated of five or whatever. Consider some payments from social security. Work three more hours per week after retirement. Work six months longer at the current job till 65 1/2. Take in a boarder for some extra income. They can, by themselves, or in tandem with other opportunities, all provide an adequate and acceptable retirement.

Note that we did this under very conservative conditions.

We have NOT considered a pension

We have NOT considered extra savings outside of the 401(k).

WE have NOT considered an IRA

We HAVE considered a formal budget

We HAVE considered a revised retirement budget

We HAVE considered an astute investor- but not overly aggressive nor unrealistic.

We HAVE revised inflation, but still stayed within conventional acceptance.


I will add a cautionary element however. The above exercise is fairly straightforward. If you start to add in a college education, different time frames when other money is needed, poor job prospects, etc., the exercise takes on a lot more probabilities and can easily make the planning process rather involved and complicated. (Trying to fund for college education out of existing earnings or by taking out loans on a home or through 401(k) plans is really tough and requires some expert insight.) I admit that many people are loathe to hire anyone to help them through these messes, particularly because they are concerned about the planner trying to sell them something (normally justified), but I would suggest the use of a fee only MSFP who should be able to take some rather involved situations and do a review for $500 to $1,000 assuming you have all your figures together.