NEW YORK (CNN/Money) - I have two stockbrokers who have assured me I will have enough money when I retire. But I feel I need more data to feel sure. Should I use an independent financial planner in addition to the brokers?
--Ann Weiser, Alexandria, Virginia
I guess it depends on what analysis your stockbrokers have relied on to make their assessment. Is it a hunch? Or have they made some reasonable assumptions and run a few projections based on different scenarios?
Conceptually, figuring out whether you're accumulating enough dough for retirement isn't very tough to do. You begin at the end -- that is, deciding how much annual income you will need to have the lifestyle you wish in retirement. You can rely on one of the old rules of thumb to come up with a figure -- i.e., take anywhere from 70 percent to 100 percent of your current income -- or you can do a full-blown retirement needs analysis in which you estimate expenses for everything from medical care to food and shelter costs to the tab for wintering in Boca and summering in Saratoga.
Now, figure out how to get to your goal
Once you've decided on the amount of money you'll need each year, you can see what you've got to do to raise that amount. First, take all the money you've got saved that's earmarked for retirement, whether in tax-advantaged accounts like 401(k)s and IRAs or in taxable accounts. Then, figure out how much you're likely to add to those accounts.
Next step is to estimate what kind of return you'll earn on your savings and continued contributions. The return you plug in should reflect the way your retirement savings are divvied up among various asset classes (stocks, bonds and cash).
Finally, you'll want to be sure that, assuming you hit your target amount, it will be able to carry you through retirement. So you'll want to see how your retirement stash fares assuming different returns and different withdrawal rates.
Now, as I said, conceptually this is no big idea. But the details can be maddening, and the number crunching can be intense. Any advisor you have should be able to do all this for you and explain each of their assumptions so that you understand them.
Be careful, though. Some investment advisers are still using simple spreadsheet programs in which they simply apply an average rate of return, say, 10 percent, to your retirement balances each and every year. That approach doesn't reflect reality. Stocks and bonds don't give the same percentage return year after year. The returns bounce around.
And when you're adding money to a portfolio (as most of us do prior to retirement) or pulling money out of your portfolio (as most of us do during retirement) the order of returns can have a major impact on the value of your portfolio.
Ideally, the person you hire to do this for you should be using software that uses "Monte Carlo" simulations or other statistical techniques to generate thousands of scenarios with a variety of different returns and possible outcomes. This way, you'll get a sense of what your percentage chances are of reaching your retirement goals and how those odds change under different assumptions.
Do-it-yourself planners
Of course, you can always try to do some of this yourself. Our Retirement Planner calculator can help you set your retirement income goals and see how likely you are to achieve your goal. And to get an idea of how long your retirement stash is likely to carry you in retirement, I suggest you check out the Retirement Income Calculator on the T. Rowe Price site.
There's also at least one site that combines both the accumulation and draw-down phase of retirement planning -- financeware.com -- although it costs $19.95 per month and can be a bit daunting if you're not familiar with the ways financial projections are made.
But I guess the first stop for you is your broker's office (or brokers' offices, as the case may be) to see whether they've run realistic projections to assess your retirement prospects, or whether they're just blowing hot air.
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