Financial Planning Tools

Retirement Optimizer
Asset Optimizer

After years of neglecting their retirement savings, Americans are experiencing a case of "savings panic." Many middle-aged investors, concerned their golden years won't be so golden, are throwing money into mutual funds before developing an overall game plan. Among older Americans, the fear of running out of money has led many to conclude they must preserve capital at all costs.

Our advice for retirement-oriented investors: don't panic. The best investment decisions are unemotional ones, and it is hard to be unemotional in a state of panic. Planning for retirement should be done in a factual, step-by-step way.

First, estimate how much annual income you need in retirement. Second, estimate how much you need to have saved to generate that income. Third, project how much your current savings will be worth by the time you retire. Fourth, determine how much more you need to save each year to reach your retirement goal. Finally, set an asset allocation for your portfolio that reflects your return requirement and risk tolerance.

The first four steps are outlined in the our Retirement Optimizer. If the worksheet determines you must save an unrealistic amount each year, you have three options: reduce your required retirement income, delay your retirement, or invest more aggressively.

The worksheet assumes your investments earn 8% before retirement and 7% after retirement. With a mostly stock portfolio, you should be able to do better. But don't forget that stocks often decline -- sometimes by a lot.

Your portfolio should be tailored to your individual return requirements, risk tolerance, liquidity needs, time horizon, and tax situation. Our Asset Optimizer should help you design an investment strategy and set an asset allocation. Answer the questions as accurately as you can, then use the portfolio recommendations as a rough guide.

Remember, though, that no preformatted worksheet should do the entire job of determining your asset allocation. It is crucial that you feel comfortable with your portfolio. Otherwise, you may make knee-jerk decisions when market conditions change; unless you have confidence that the allocation you set was the right one for the long haul, you may be tempted to shift gears simply because the market is rising or falling.

In general, retirement investing can be divided into the pre-retirement accumulation stage and the retirement / drawdown stage.

Accumulation stage. In the buildup to retirement, your primary objective should be growth. The Forecasts Growth Portfolio is designed for long-term investors seeking growth. If you prefer, substitute individual stocks for the U.S. stock funds in the portfolio. But do not neglect foreign stocks, and do not concentrate all your domestic holdings into the same types of funds or stocks. By spreading your portfolio among different asset classes, you can lower overall volatility without lowering expected return.

Retirement/drawdown stage. Many investors shift their portfolios into bonds once they reach retirement. That is a mistake. The average life expectancy of a 65-year-old is 20 years. Retirees that invest strictly for income and ignore growth will see their purchasing power eroded by inflation.

The Conservative Portfolio represents a reasonable allocation for a retiree under 75. Based on historical asset-class performance, the Conservative Portfolio has an expected return of 14% per year. If that return is higher than you need and you are uncomfortable holding roughly 75% of your portfolio in stocks, shift more of the portfolio into bonds.

However, do not shift into bonds simply because you need more income. Many retirees have been taught that dipping into capital is foolhardy, so they limit themselves to high-yield securities. But spending some capital is better than holding a portfolio with too little growth potential.

How much capital can you afford to spend? The answer depends on your life expectancy and investment returns, as the table below shows. For example, an investor earning 6% returns could withdraw 8% of his or her portfolio for 24 years.

Percent Withdrawn Annually Number of Years Before Assets Are Gone
5% 42
6% 29 37
7% 22 26 34
8% 18 21 24 31
9% 15 17 19 23 29
10% 14 15 16 18 21 27
11% 12 13 14 15 17 20
12% 11 12 12 13 15 17
13% 10 10 11 12 13 14
Average Annual Return on Remaining Assets 4% 5% 6% 7% 8% 9%



Retirement Optimizer


Retirement financial baseline (do not use commas in the $ figures)

In today's dollars, estimate your annual retirement expenses.

(Financial planners generally estimate you'll need 70% of your pre-retirement income.)
$
     
Annual amount expected from pension and social security. $
     
Amount needed annually in retirement from personal savings: $


Retirement savings goal

Select your target retirement age and enter the factor from the table below:

Retirement Age 55 60 62 65 67 70
Factor 21.5 19.6 18.8 17.4 16.4 14.9

Enter a factor from the table above:  
Amount you need to have saved by retirement age: $


Projected value of current savings

Amount already saved, including IRAs, 401(k), and other investments. $

Select the number of years until retirement and enter the factor from the table below.   


Years until retirement: 5 10 15 20 25 30
Factor: 1.2 1.5 1.8 2.2 2.7 3.2

Enter a factor from the table above:  
Estimated value of current savings. $


Additional savings required

Amount needed in addition to current savings. $

Select the number of years until retirement and enter the factor from the table below.


Years until retirement: 5 10 15 20 25 30
Factor: .184 .083 .050 .034 .024 .018

Enter a factor from the table above:  
Amount you need to save each year to reach your goal: $

 


Asset Optimizer


1. Approximately what portion of your total "investable assets" — the dollar amount of the investments you currently have — will this investment represent?

Less than 25%"
Between 25 and 50%
Between 51 and 75%
More than 75%

2. Which ONE of the following describes your expected future earnings over the next five years? (assume inflation will average 4%)

I expect my earnings increases will far outpace inflation. (Due to promotions, new job, etc.)
I expect my earnings increases to stay somewhat ahead of inflation.
I expect my earnings to keep pace with inflation.
I expect my earnings to decrease. (Retirement, part-time work, economically-depressed industry, etc.)

3. Approximately what portion of your monthly take-home income goes toward paying off installment debt (auto loans, credit cards, etc.) other than a home mortage?

Less than 10%
Between 10% and 25%
Between 25% and 50%
More than 50%

4. How many dependents do you have?

0
1
2-3
More than 3

5. Do you have an emergency fund?

No
Yes, but less than six months of after-tax income.
Yes, I have an adequate emergency fund.

6. If you expect to have other major expenses (such as college tuition, home down payment, home repairs, etc.) do you have a separate savings plan for these expenses?

Yes, I have a separate savings plan for these expenses.
I do not expect to have any such expenses.
I intend to withdraw a portion of this money for these expenses.
I have no separate savings plan for these items at this time.

7. Have you ever invested in individual bonds or bond mutual funds?

No, and I would be uncomfortable with the risk if I did.
No, but I would be comfortable with the risk if I did.
Yes, but I was uncomfortable with the risk.
Yes, and I felt comfortable with the risk.

8. Have you ever invested in individual stocks or stock mutual funds?

No, and I would be uncomfortable with the risk if I did.
No, but I would be comfortable with the risk if I did.
Yes, but I was uncomfortable with the risk.
Yes, and I felt comfortable with the risk.

9. Which ONE of the following statements describes your feelings towards choosing an investment?

I would only select investments that have a low degree of risk associated with them (i.e. it is unlikely I will lose my original investment).
I prefer to select a mix of investments with emphasis on those with a low degree of risk and a small portion in others that have a higher degree of risk that may yield greater returns.
I prefer to select a balanced mix of investments -- some that have a low degree of risk, but with emphasis on others that have a higher degree of risk that may yield greater returns.
I prefer to select an aggressive mix of investments -- some that have a low degree of risk, but with emphasis on others that have a higher degree of risk that may yield greater returns.
I would only select an investment that has a higher degree of risk and a greater potential for higher returns.

10. If you could increase your chances of improving your returns by taking more risk, you would:

Be willing to take a lot more risk with all your money.
Be willing to take a lot more risk with some of your money.
Be willing to take a little more risk with all your money.
Be willing to take a little more risk with some of your money.
Be unlikely to take much more risk.

11. In approximately how many years do you expect to need the money you're investing?

2-3 years
4-6 years
7-10 years
11-15 years
More than 15 years

12. Do you expect to withdraw more than one-third of the money in this account?

No
If Yes, when do you expect to withdraw from the account?
Within 3 years
4-6 years
7-10 years




Add up total points for all 12 questions.

Based on your answers to the above questions, our Asset Optimizer has awarded you a total point score. Compare that point score to the point ranges in the boxes below, then use the portfolios below as a guide.

Score Portfolio Short-term % Bonds % Stocks %
If you're investing for less than two years: 100% Short-Term Portfolio 100% 0% 0%
0 to 75 Capital Preservation Portfolio 50% 30% 20%
76 to 132 Moderate Portfolio 20% 40% 40%
133 to 179 Wealth-Building Portfolio 5% 30% 65%
180 or more: 100% Stock Portfolio 100% 0% 0%