Monday, August 03, 2009

Forecasting for Retirement: my approach

One of the key factors in my personal finance adventure has been dealing with the concepts of estate planning and also retirement planning. There are various calculators out there for helping you estimate your needs at retirement but I take a somewhat different approach.

My approach is that instead of looking at the amount of money you'll need and saving enough to get you to that goal, I first look at what I am saving and see what it could possibly get me in retirement. Of course all of this is a forecast. Currently I'm forecasting for six percent returns and two and a half percent inflation in this exercise. Then I see what is available when I invest in this way on a monthly basis for the next thirty years and take a four percent distribution divided by twelve as a monthly withdrawl down out of the accounts.

Many people might think that this is the same old thing. But I try to be pragmatic. I will certainly try to stay on track but life throws curveballs. My method lets me check in on what is happening now. And mostly the value for this approach is that I can learn to live with what I will most likely have instead of being a dreamer about what I should have amassed.

The burden is on me. If I make a mistake I have no one to blame but myself. And when I use other calculators like the one on fidelity website, they focus on expenses. But I can't forecast that as accurately as I would like. I would like to think however that the forecasting that I can do is better suited to my situation than he generic forecasting done by large financial firms with a one-size-fits-all approach.

Another major aspect of the approach is that I expect to shift to a buckets of money strategy as I get into my forties and fifties where risk becomes much more of a concern. In short though, I think that the stock market holds real promise. And not despite the fact that there could be a strong retrenchment soon according to noted financial advisor Jonathan Pond, but because of it. That is, the idea of another retrenchment is somewhat exciting as another buying opportunity. In reality, the money in some sense is made in those down markets.

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