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Subject:  Re: Making a Graduate Annuity Date:  4/28/2013  2:59 PM
Author:  BruceCM Number:  72120 of 78657

A good effort at calculating your retirement savings need.

I agree with you that the numbers tossed around by the investment/insurance industries that the media just loves to pick up and toss around some more, can seem to be excessive to many. But these 'averages' can be misleading, as it really depends on what household income you'll require during your retirement years, which in term will depend on life expectancy, average annual market returns and so on.

Having taught this subject at our local university based CFP course for the past 9 years, let me offer this 2 step approach to determine how much you'll need in your retirement savings accounts when you hit the magical first year of not having to get up and go in to work.

First, as you've done, one needs to make reasonable assumptions. Remember, we are dealing with an uncertain future, and the best we can do in planning for it is to start with assumptions that we feel are the 'best fit' or 'most likely' for our future:

- Average annual inflation rate and average annual wage inflation. Most planning calculations will only use one to represent both, although wage inflation is usually about 50 to 80 bp higher.

- Average annual rate of return. This should be different for accumulation years vs. retirement years. 8% today is a bit on the high side for accumulation years: 7 to 7.5% is more commonly used, likely due to anticipated slower economic growth over the next 20 years when compared to the past 20. During retirement this should drop to 5.5 - 6.5%, due to the higher bond (lower volatility) allocation.

- Age of anticipated retirement. Usually 62 to 65 or later, although this can vary on the type of employment and ability to retire.

- Life Expectancy. Multiple on-line sources for this, as you've pointed out. But also consider family longevity genes as well as genetic propensity to disease that will usually shorten life expectancy. much to you need?

Step 1: Grow current household income to first year of retirement, adjusting for SS benefit and for (usually) reduced household income need once retired. Take gross household income, reduce it by current SS retirement benefit and multiply this by a retirement income need factor, usually .7 to .8 (higher for low income households, lower for higher income households). then calculate the future value of this using suitable wage growth index. An example here will help:

Current household gross income: $100,000
Years to retirement (currently