In Parts I & II of this series, we reviewed the process of planning for how much retirement income will need to be generated by your investment plan to supplement Social Security and pension income. We also highlighted how longer life expectancies and personal goals of retirees can create stress on a retirement income plan. If you missed Parts I & II you can read them by visiting my blog under the “About” tab at www.breitercapital.com or at the Sun’s archives at www.amisun.com

In this final segment we will review the safe withdrawal rate concept and give an example of how to calculate an appropriate retirement nest egg for your income needs. This includes the income to support your desired retirement lifestyle and leaving a legacy to your chosen heirs.

The original work on the safe withdrawal rate was done by William Bengen, a financial planner from southern California. Using historical return data on the stock and bond market including good and bad times, he concluded that a 50-50 mix of stocks and bonds could support a 30-year retirement distribution period if the initial withdrawal rate was limited to 4.2 percent, and then adjusted by 3 percent annually for inflation.

The success of this plan depended on the investor staying in the markets through thick and thin and not abandoning the plan. Subsequent studies on this topic have expanded Bengen’s work to include additional asset classes such as small cap stocks, international stocks and REITs. The addition of more asset classes along with annual rebalancing of the portfolio has been shown to increase the safe withdrawal rate closer to 5 percent, with a 95 percent probability of success. For our purposes of calculation, we’ll use 4.5 percent as the safe withdrawal rate.

So, let’s conclude with a hypothetical example. Mr. and Mrs. Brown are planning their retirement. They will collect Social Security of $35,000 per year combined at full retirement age, which coincides with their retirement date objective. Mrs. Brown will have a small pension of $5,000 per year from a teacher’s assistant job she held earlier in her career.

Their combined income today is $120,000. They have reviewed their anticipated retirement lifestyle and believe that 80 percent of their current income, or $96,000, will be sufficient for their needs and discretionary spending goals in retirement. With $40,000 of guaranteed income from Social Security and Mrs. Brown’s pension, they need to create $56,000 of additional income to achieve their goals.

If we take their additional income needed ($56,000) and divide by the safe withdrawal rate of 4.5 percent (0.045), we realize that they will need to have an investment plan total of $1,244,444 at retirement in order to meet their goal of having inflation adjusted income with a high probability they will not run out of money during their lifetimes. They can now review what they have in their investment accounts today and come to a conclusion on some savings goals to help them reach the total investment objective.

If they find they will not be able to reach the goal, there are choices that can help. One great strategy is to work another year or two, which helps in two ways. First, working longer allows for more savings and growth of assets in the investment plan. Second, by working longer and delaying Social Security, they will realize an increase in benefits – an additional 8 percent per year between their full retirement age and age 70.

Obviously this is a simple example and there are a multitude of other factors that could change the calculation, such as the Browns inheriting money from relatives, forced early retirement due to health conditions or the need to take care of aging parents. Life makes this a complicated process, but by starting with the basic calculation and adjusting for other factors, you can arrive at a plan.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.