04/03/2013 02:17 pm ET Updated Jun 03, 2013

Worried About Being a Bag Lady in Your Old Age?

I recently read a survey from a prestigious financial services firm that said 50 percent of women fear being a bag lady. I'm guessing that figure is much higher. It's a fear most women share -- the fear of being dependent and alone and impoverished in our old age. And if men were smarter, they'd worry too -- unless they have a spouse to take care of them!

In that context, I propose a new definition of wealth: Freedom from worry about money! Think about it from your personal perspective, and especially in the context of retirement planning. Everyone will have a different definition of how much is "enough" to keep from awakening in the early morning hours, wondering if you will run out of money in your old age.

So, let me give you three simple tips to put the concept of retirement "wealth" in perspective. When I wrote my recent book, The Savage Number: How Much Money Do You Really Need to Retire?, I described the sophisticated "Monte Carlo" modeling process offered by certified financial planners, as well as financial firms such as Fidelity, Vanguard and T. Rowe Price, that are designed to give you an investment and withdrawal plan to make your money last as long as you do.

But here's an oversimplified, but stunning approach to figuring out your "number." There's pretty general agreement that with appropriately diversified investments, you can withdraw about 4 percent of your assets annually, and make them last through a 30-year retirement period.

Now, these are very rough numbers, but let's assume that you need $100,000 a year, after tax, to maintain your current lifestyle. In order to withdraw that much every year, you'd need savings of about $2.5 million to be able to spend $100,000 a year -- and make your money last your expected lifetime!

But, wait. If that "savings" is in a retirement plan, then you'll have to pay taxes when it is withdrawn. That means you'll need about $3.25 million in retirement plan savings to receive $100,000 every year on net of taxes, and have a pretty good chance you won't outlive your money.

Of course, Social Security will contribute additional money, and so will any pension you have earned. But still that's a lot of money in today's dollars. And that brings up the next issue: the value of your dollar in retirement.

Impact of Inflation Today we enjoy very modest inflation. There's reason to worry about future inflation because of all the money creation recently by the Federal Reserve. But let's just stick with historical averages. Over the past 70 years, the United States has had an average annual inflation rate of roughly 3 percent.

Even at that low 3 percent rate inflation rate, the buying power of your money will be cut in half in just less than 25 years!

So your investments will have to more than keep up with inflation. That's the reason you can't simply buy a lifetime annuity with your retirement savings, guaranteeing you a monthly check as long as you live. That check might be enough to cover your expenses now, but will that fixed amount be able to pay for your lifestyle when costs double, simply because of inflation?

Historically, over the long run, a diversified portfolio of stocks with dividends reinvested has kept up with inflation for every 20 year period going back to 1926, according to Ibbotson market historians. And gold has kept up with inflation throughout history. That's something to think about as you plan your retirement investments.

Unforseen Disaster -- Long Term Care While most people fear a stock market crash will devastate their retirement plans, the one thing that could quickly invalidate all your investment planning is the need for long term custodial care in your later years. This is the kind of care that is not covered by Medicare, or Medicare supplements. If you have become almost completely impoverished, state Medicaid programs will put you into one of their nursing homes -- a possibility to be devoutly avoided as Boomers age and resources are strained.

Despite all the bad publicity about rising prices of Long Term Care insurance, you owe it to yourself to purchase at least a policy that will cover a portion of your costs -- perhaps one to three years of care, for about $200 per day, with some inflation protection. Or you can consider one of the new "combined" policies that offer both long term care benefits and a death benefit (or cash value withdrawal) if you don't use the care benefit. You make a one-time cash deposit into the policy, leveraging your dollars to pay for care.

The need for long term custodial care will become a huge issue in coming years, especially for women. If you're part of a couple, it is likely your spouse will need care first -- using up the family financial resources, and your energy as a caregiver. And women alone especially need the resources of finding caregivers that come with an LTC insurance policy.

So there you have it -- an honest look at the three factors women need to deal with so they don't wake up in the middle of the night worrying about money. Peace of mind about money. That's my definition of wealth. And that's the savage truth.