07/16/2014 09:26 am ET Updated Sep 15, 2014

Retirement: When Is Enough, Enough?

Thinking about retirement can be overwhelming. The idea of planning for something that won't happen for years, might last 30 years, and could cost millions is enough to make you leave it all to chance. But that's the worst possible retirement plan. Would you be willing to substitute something much simpler?

That's the concept behind the technique being urged by Michael Falk, Partner at Focus Consulting Group and Chief Investment Strategist and Mauka Capital, LLC, who has the gift of simplifying important financial concepts.

He and I have talked over the years, and he's influenced my thinking along the way. But when I heard Falk's keynote address given at the recent Morningstar conference, I knew I had to share it with you. It is probably the most compelling and game-changing way you will approach the topic of retirement planning.

So even if you've given up on ever being able to retire, you'll want to watch this video on the Morningstar website.

The concept is a simple one, that doesn't need computerized forecasts and models, or retirement withdrawal rates, or possibly even professional guidance. Once you understand the basic principle, it could help you save up for retirement, plan a retirement lifestyle, and take a lot of the worry out of handling your money during retirement.

Please, let me know if I'm overstating the case -- but it's an issue that has preoccupied me ever since a decade ago when I wrote The Savage Number: How Much Do You Really Need to Retire? It's the issue facing people who do have the possibility of living well in retirement because they are employed and thus can save money during their working years. But they don't know "how much" they need, and equally important, how much they can draw out of their savings to make their money last as long as they do.

Here's how Falk states the principle: "You must immunize for your needs before you even try to optimize (in risky assets) for your wants."

Those words are a fairly profound way of saying that if you can arrange enough regular income to cover the basic expenses of your life, then you can sustain the risk of investing other assets strategically to cover desirable retirement dreams such as travel and entertainment. Or as they say in the stock market, find your "sleeping point" and make sure you are covered with income that lets you sleep.

Cover Your Overhead

You can plan around what your Social Security check will bring in, and a pension if you're fortunate enough to have one. Then ask your IRA custodian for an estimate of minimum annual required distributions after age 70-1/2. If you can get your overhead down to the point where your annual income covers the basics, you will find retirement peace of mind.

Suggestions for doing that include paying down the mortgage before you retire, or buying a fully paid up car which you plan to keep for 10 years, eliminating a car payment. Once your overhead is manageable and balanced with your secure income, you can make riskier investments to grow your remaining money to give you the retirement you want, above the basic needs.

Adjust Your Time Horizon

The second piece of advice is to not become overwhelmed with the longevity issue. First, accept the fact that you will probably work longer than your parents -- likely to age 70, if your health and workplace allow, or even earning part-time income to supplement retirement assets. Then don't worry about living to 95 -- which is always a possibility. Instead, focus on the actuarial tables which say "on average" you're likely to live to somewhere around 83. That shortens your focus for retirement planning, and makes planning more doable.

But what if you're one of those who do live longer? Easy answer: You can take some of your money and buy a "longevity annuity" (more on that in my next column), which starts paying out at age 83, and will give you a monthly check for as long as you live. That "deferred payout" will not only be much less expensive than purchasing an immediate annuity; it will help cover the extended expenses of living longer.

Trade Today for Tomorrow

And, of course, there is still the importance of saving more. How much more depends on your situation. But spending less today and saving more for tomorrow is not a dollar-for-dollar tradeoff. Instead, the money you don't spend can be invested to work for you over the years. The earlier you make this decision the better, because time leverages money.

Clearly, this perspective doesn't help the millions of Americans who are simply living day-to-day, unable to save for retirement (although a budget review might find a small amount to put away regularly). But the concept will take the confusion and angst out of thinking about retirement for those who worry about having "enough" to enjoy their retirement years.

Falk says it's important to keep your mind focused on these simple principles, because the average person gets overwhelmed by the complicated -- and simply gives up or loses focus!

This is about as simple as it can be. So here's that link again. It's worth viewing again. Because it really will give you the confidence to do something about retirement. And that's The Savage Truth.

5 Ideas For A Thrifty Retirement
5 Ideas For A Thrifty Retirement