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Paint a rose-colored retirement


Some standard assumptions about portfolio growth and future income needs may be flawed or outmoded. Make sure your own plan's on target.


How the investment rules are changing

Paint a rose-colored retirement

Some standard assumptions about portfolio growth and future income needs may be flawed or outmoded. Make sure your own plan's on target.

By Doreen Mangan
Senior Editor

Like most doctors, you're probably saving diligently for retirement. But are you saving the right amount?

Put away too little, and you might end up clipping supermarket coupons to make ends meet in your so-called golden years. Pinch too much, and you might deprive your family. It would be a shame to realize too late that your kids could have gone to schools of their choice, instead of to the low-priced state college you opted for.

To save the right amount, it's important to know how big a nest egg you'll need by the day you retire. Estimating that requires you to project how fast those savings will grow before and after retirement, how much it will cost to live comfortably in retirement, and how long your retirement will last. None of this is easy—especially since several key yardsticks touted by financial advisers for years have outlasted their usefulness. Let's take a look at some dangerous misconceptions:

In retirement, I'll need only 70 percent of my pre-retirement income. Forget this often-used rule of thumb. Sure, some costs will drop in retirement, and you could wind up spending less than you do now—or you could find yourself spending much more. Do you want a quiet retirement in a cottage by a trout stream? Or are you itching to ski at top resorts around the world?

Whatever your plans, your lifestyle alone won't determine how much you'll spend. While some expenses, such as disability, malpractice, and term life insurance premiums, will disappear in retirement, others will take their place. For example, if you retire before you're eligible for Medicare, you'll need to buy health insurance for you and your spouse, and that may run $6,000 a year or more. Even if you're covered by Uncle Sam, you'll need a Medigap insurance policy; figure on shelling out at least $1,500 annually for that. In addition, you may still have a kid or two in college. Elderly parents might look to you for financial help. And, of course, you'll need play money.

"Most of my retired doctor clients need as much income as they did before they stopped practicing, if not more," says Champaign, IL, financial planner Mary F. McGrath. "A doctor who loves golf may want to buy a vacation condo in Florida. Many doctors who couldn't travel extensively while in practice want to make up for lost time. They may even bring along grandchildren or other family members."

So McGrath often builds in a travel budget—roughly $10,000 to $20,000 a year—for at least the first five years of retirement. "People will travel as long as they're healthy and energetic," she says.

But even as they get older and travel less, retirees don't necessarily need less income; the money just goes to different places. "Their priorities change," McGrath says. "They may help with a grandchild's college expenses or find themselves with medical costs they didn't expect. I think it's better to overestimate income needs in retirement just a bit."

To help clients decide how much they'll need, McGrath analyzes their current income and expenses, then considers how those might change in retirement. You can conduct a similar analysis using the worksheet below.


Step 1: Figure how much
retirement income you'll need

Current annual cost
Estimated cost after retirement
Repairs and maintenance
Household help
Car ownership/operation
Travel and recreation
Uncovered medical bills

(Multiply subtotal in right-hand column by appropriate compounding factor from table to get inflation-adjusted amount)

Average annual retirement income needed

Years to retirement
Compounding factors


I'm mostly in stocks, so I can expect 20 percent annual returns. Besides unrealistically inflating the value of some companies, returns over the past few years have given many investors an exaggerated idea of how much retirement cash their portfolios can deliver. Yes, stocks have done well long term: Since 1926, they've performed better than any other investment class, earning an annual average of more than 10 percent. Recently, despite some steep drops, they've done even better than that. But most experts caution that the flashy stock returns of the past few years won't continue long term.

Keep in mind that the 10 percent average annual return from stocks includes past boom markets that eventually fizzled. In fact, given last year's huge gains, stocks could underperform miserably for years and still fall within the long-term norm.

If you figure on earning more than 10 percent annually on your stock holdings, you could be in for a big disappointment. Use the table below to judge what returns you should reasonably expect from stocks and other investments.


Step 2: Figure how much you must save

Once you've estimated how much you'll need annually during retirement, you can calculate how large a nest egg it will take to generate that amount. To do so, multiply the annual income required by the appropriate factor from the accompanying table.

Say you want to set aside enough to give you $70,000 a year for 25 years. If you assume your nest egg will return 8 percent annually after you retire, your factor is 10.8. Multiply that by $70,000 to determine that you'll need to save $756,000 by the time you retire.

The factors work both ways. If you know roughly how big your retirement fund will be, you can divide the amount by one of the factors below to estimate how much annual income your nest egg will provide. Say you figure you'll have $1.5 million on the day you retire. If you expect to earn 7 percent returns during retirement and want the money to last indefinitely, your factor is 14.3. Divide the nest egg total by that number, and you'll see that you should have an annual retirement income of just under $105,000.

Assumed return on retirement fund
15 years
20 years
25 years


After I retire, I should invest mostly in bonds. "Retirees think they should invest all their savings in bonds, to generate income and because they can't afford any more risks," McGrath says. "It isn't necessarily true." She recently explained why, to a 62-year-old doctor client who'll retire this summer. Eighty percent of his savings are in stocks, and he was wondering whether he should become more conservative. "My response was No," McGrath says. "People are living longer these days, so this pool of money will have to last him 20, 30, maybe 35 years. If he wants $10,000 a month to live on during retirement, I have to manage the portfolio so it will provide that much. Some of the money will be from income, but most will come from appreciation of equity."

McGrath advises most of her retiree clients, especially the youngest ones, to keep a minimum of 80 percent in equities—at least during their early retirement years, while they're active and perhaps spending the most heavily.

True, in any one year, you could take a bath in stocks. However, over five years, your chance of loss is small; over 10 years, it's negligible. Even in your post-work years, then, at least a portion of your nest egg will likely stay invested long enough to overcome stock market swings.

If you've been figuring on a bond-heavy portfolio in retirement, this is good news. Boost the percentage of your portfolio you'll devote to equities in retirement, and you can also raise your projected return. That means you won't have to save as much between now and the time you retire.

I'll save enough to cover me from age 65 until I die. If you're basing your savings goal on the assumption that you'll work until age 65, you may want to rethink that. More and more people are retiring early, and you might later decide to do the same.

Moreover, if you haven't checked the life expectancy estimates lately, you could be in for a happy surprise. Life-span projections have been rising steadily (see table below). And because you could live longer than your projected life expectancy, which is only an average, better figure on having enough money to last at least 10 additional years, as a safety margin.


Step 3: Estimate how long you'll live

In the left-hand column, find the number closest to your age. To the corresponding number in the right-hand column, add your age. For example, if you're a 40-year-old female, your life expectancy is almost 81. For retirement-planning purposes, better add 10 years to that figure, as a safety margin.

Projected additional years


If you've been relying on any of the questionable assumptions we've just discussed, you'd be well advised to fill out the worksheets and study the tables that accompany this article. They'll give you a more realistic idea of how many years you'll spend in retirement, how much cash you'll need per year, how big a nest egg you'll require on the day you quit working, and how much your nest egg will earn now and in retirement.


Step 4: Estimate the return you’ll get on your assets

Type of investment
Annualized rate of return
S&P 500 stocks
Small-cap stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
US Treasury bills


Sites to help you polish your retirement plan

Although the worksheets and tables included with this article can point you in the right direction, you'll need computer power to craft a precise plan. You'll find retirement calculators and tools in Quicken and Microsoft Money, the leading personal finance software programs, as well as on the Web. We advise you to work with more than one of those calculators, though, since they're based on varying assumptions about inflation, rate of return, life expectancy, and other factors. Here are a few sites worth visiting:

Financial Engines
Provides a free financial retirement planner.
Provides links to retirement sites, including a longevity calculator.
Helpful if you're planning to relocate in retirement. Allows cost-of-living comparisons for many US cities.

T. Rowe Price
A retirement-planning and calculator site.


. Paint a rose-colored retirement. Medical Economics 2000;10:78.

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