Determining Failure Points for our Retirement Savings

Until now, we've been estimating retirement success based on probabilities of our savings lasting with a projected investment return of 7%, estimated living expenses at 14% above our current level and 4% average inflation. This analysis has shown that we have sufficient savings to last until our nineties, with a confidence limit of 86%.

Given the volatility of the stock market and the slow economic recovery, I am no longer confident that we will be able to achieve the assumptions used in the previous retirement savings analyses. Therefore, I've asked our financial advisor to help us identify specific points where our retirement savings will fail to meet our needs. Here's what our financial advisor will provide us when we meet in two weeks.

Minimum investment return. An analysis can be done to show the minimum investment return needed to fund our retirement into our nineties. In addition, a separate analysis will be done on my company stock and stock options to determine the returns needed.

Minimum funds needed by age. The analysis will also show the amount of savings needed at each age to ensure a success retirement. Since retiring in October, 2007, we've been using a 20X salary savings target, which was probably above the minimum needed. This analysis will give us a better understanding of what multiple to target for during each year of retirement.

Different income needs. Both the invest return and minimum funds required analysis will be done at three different annual income levels: 1) current annual spending; 2) 114% of current spending; and 3) our original retirement income target, which is 142% of current spending levels.

With this information, we will be able to better understand our capability to maintain our retirement. In addition, we will have identified specific minimums that need to be met to continue with our retirement.

I expect to have specific numbers for each area by early August, 2010.

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This is not financial advice. Please consult a professional advisor.

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