Planning Your Trip to the Future

When you plan a road trip, what’s the first step? Map your route? Create an itinerary? While it may seem obvious, the first step is knowing your starting point.

If you’re like most people, you probably don’t know the details of your investment portfolio, so taking an inventory of your assets is a good way to begin planning your trip to retirement.

Gather up all of your investment and bank statements. Don’t forget those 401(k) plans from previous jobs. Write down each investment or, better yet, enter them into a spreadsheet. Then determine what they are: equities (stocks), mutual funds, or fixed-income investments like bonds? How much are you paying in ongoing fees, if any?

For better clarity, check Morningstar stock and fund ratings to learn whether the stocks are in the U.S. or overseas, large cap or small cap, value or growth. For fixed income, you want to know the credit quality and duration of the bonds.

After gathering all of your portfolio information, it’s time to make some informed estimations. How much income will you need and at what age will you need it? What are your likely sources of income and how much of that is reasonably certain? Finally, decide how much market volatility can you tolerate and how much risk you need to take to meet your goals.

From here, the process is pretty straightforward. Subtract the amount of reasonably certain income from the amount you believe you will need in retirement. The number remaining is the amount of income you will need to generate from your investments. Now it’s time for some guesswork: What is a reasonable expected return on your investment portfolio?

Past historical returns—after inflation—have been as low as 1 percent to 3 percent average annual return for safe fixed-income investments and real estate to as high as an average of 7 percent to 9 percent per year for U.S. stocks. The past tells us nothing specific about the future, although it is reasonable to expect that equities will provide higher returns than bonds.

There is no way to know what a portfolio will return in the future, which is why we must estimate. If your guess is too optimistic, there’s a good chance you won’t end up with enough to meet your future needs. A perfect example of optimistic projections are the many pension plans that are dangerously underfunded. You’re better off making conservative estimates. Personally, I like using 2 percent for bonds and 6 percent for stocks. You may want to play it even safer.

Here’s an example:

  • Your current goal is to live on $80,000 annually when you retire.
  • You expect $40,000 per year from Social Security and a small pension.
  • You have a $400,000 total portfolio split evenly between stocks and bonds from which you expect 4 percent per year, or $16,000 if you started taking income today.
  • This means that if you retired today, you need an additional $24,000 annual income.
  • Your portfolio needs to increase by $600,000 to meet your goal.

Now that you know where you stand today, you can plan for increasing your savings, lowering your income needs, delaying retirement, increasing your portfolio return, or some combination of these.

If you feel overwhelmed by the thought of creating a retirement plan, you’re in good company. That’s why there are thousands of financial professionals in the world. If you need help, just be sure to hire a fee-only registered investment adviser or financial planner who doesn’t sell commissioned products and is always required to act in your best interests.

The host of the nationally syndicated Don McDonald Show for over 20 years, Don now co-hosts Talking Real Money with Tom Cock on Seattle’s KOMO radio Saturdays at noon ( Don also publishes the investing magazine, real investing journal (

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