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Safety In Numbers: What You Need to Know About Your Retirement Plan Now

06/30/2015 03:34 pm ET | Updated Jun 30, 2016

A chance Uber POOL ride to the airport sparked a conversation about a doctor's retirement plan that most definitely needs patching up. Step one is to run the numbers to make sure your retirement plan is actually realistic and not just a vague random goal of living well for the rest of your life.

By David Rae Certified Financial Planner™, AIF®

My doctor friends tell me that everywhere from parties, to airplanes, to brunch at Cecconi's, people are eager to question them about their symptoms. As a Certified Financial Planner, I've experienced something similar with random strangers keen to ask me about their money and investments once they find out what I do.

Last week, I shared an Uber POOL ride to the airport with a 40-something doctor who, within a second of hearing my profession, spent the rest of the trip explaining her financial philosophy. The gist of her financial plan: "Save enough... into risk-free investment X earning 3 percent."

The doctor followed up with, "My husband and I don't like to spend money and our expenses are very low." But as she talked on, a few worrisome points came up that clouded her sunny assessment of their financial prowess. "But we have two young kids in private school, and both my husband (who has a PhD in mathematics) and I are paying off our student loans so it's hard to save enough most of the time."

The Known Unknowns
Under their circumstances, it is hard to save to be sure. And that's not even counting the upcoming expense of funding two college educations back to back. But here is the part that shocked me. Despite the fact that her husband is a mathematician, they hadn't run the numbers for how much they will need for retirement, let alone how much their current savings plan and investment strategy will grow by the time they get there. Between them it still never occurred to them to see if their long term plan actually has any chance of working.

As we dropped my co-rider off at Southwest, I gave her a little piece of advice -- to make sure your investment strategy will get you where you need to be, make sure to always run the numbers and adjust accordingly.

Her response was, "Do you not think my plan will work?"

I said, "I have no idea. But I really love math, and money, so if for nothing else but peace of mind, it would be good to know if you are on track, or your plan has any possibility of working. From what you're telling me, your risk-avoidance investment strategy will ensure the very outcome you are trying to avoid. You might not end up having enough of a nest egg to fully fund your retirement and the kind of life you want to lead once you stop working. But it's only by seeing the numbers in black and white that you'll know for sure."

After she left the UBER driver chimed in, "She doesn't have a chance in hell does she?"

The Doctor Is Out (on a Limb)
Some numbers can put this into perspective for you. I've met very few people in LA with children who are able to save anywhere near 50 percent of their GROSS income (that's before taxes are taken out.) To "save enough" our Doctor would need to be in this crazy high rate of saving to have any chance of this plan working.

Let's assume the good doctor started maxing 401(k) at 35. If she's contributing the maximum allowed should get here pretty close to a secure retirement, right? If she earned 3 percent per year she would have about $945,000 at age 67. With a 3 percent return she would be able to pull $2362 per month before taxes. And given that mathematics professors make less than medical doctors, even adding in Social Security means this couple's standard of living will drop exponentially.

Now if our doctor had a more appropriate portfolio and was able to average just 8 percent per year her 401(k) would group to around $2,416,000. Assuming a 5 percent withdrawal rate she we receive around $10,000 per month before taxes. That's more than 4 TIMES the amount in the scenario above. Voila! the magic of compound interest and the possibility of leading achieving financial independence, and a comfortable golden years.

See Here Now
In future posts, I'm going to be discussing how risky 'risk-free' investment can actually be along with some basics about compound interest and other issues.

Meanwhile, most of you reading this who do have a financial retirement plan (though the majority Americans unfortunately do not) believe it consists of naming a certain age where you intend to stop working, that's it. That means that most people, whether with or without a plan, probably haven't run the numbers either.

Subjectively of course, I think using a CFP® to do this for you is best. But whether you calculate this yourself or get professional help to do it, the three numbers you need to know:

1) How much your current account will grow to by the time you retire?

2) How much income can you expect from that portfolio in retirement?

3) How much do you expect you'll need each month in retirement if you wish to maintain your current lifestyle? Then add 25 percent to that figure to cover unforeseen circumstances, inflation and other things you may have been left out.

This will help get you a ballpark figure of where you stand financially. Where are you now as versus where do you want to be? If there's a disconnect, then it's time to call in a professional Certified Financial Planner™ to put your money to work for you now and in the future.

DAVID RAE, CFP®, AIF® is a Los Angeles-based retirement planning specialist with Trilogy Financial Services, a regular contributor to Advocate.com and a financial advisor to smart people across the USA. Follow him on Twitter @davidraecfp Facebook or via his website, www.davidraefp.com.

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Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA,SIPC, a Registered Investment Advisor. Trilogy and NPC are separate and unrelated entities.