TITLE

Do Accumulation Models Overstate What's Needed to Retire?

AUTHOR(S)
Tacchino, Kenn; Saltzman, Cynthia
PUB. DATE
February 1999
SOURCE
Journal of Financial Planning;Feb1999, Vol. 12 Issue 2, p62
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
This article suggests that the accumulation models have to be refined because they are overstating financial resources needed for retirement. Because of all the variables involved, it is apparent that the accumulation model provides a target that can best be described as something less than an exact science. To better understand the accumulation model it is first necessary to relate the methodology behind it. The first step is to take stock of the existing resources available for retirement. For example: Patty, age 60, bas a $100,000 salary. After using the replacement-ratio approach, Patty and her planner feel that an $80,000 target will meet her desired living standards. The computer software will effectively calculate the amount necessary at retirement to produce this stream of income over her projected lifetime. Another component of the accumulation model is the need to include inflation protection for income from existing resources. To this end, step three in the process is to account for the declining purchasing power of assets. Due to inflation, her pension and annuity must be bolstered each year to maintain a level purchasing power--she must maintain her own cost of living adjustment fund for these amounts. To protect against a four percent inflation rate, the $50,000 first-year retirement income from existing non-inflation-adjusted resources must grow to $52,000 in the second year, to $54,080 in the third year, to $56,243 in the fourth year, and must continue to grow at four percent a year. The fifth and final step is to determine the annual savings amount. This is the stream of annual savings needed to meet the target. This can be a level stream or a stepped-up stream.
ACCESSION #
1570699

 

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