Don’t Rely on Social Security or Pensions -- ‘Wealth Odyssey’ Explains Simple Retirement Saving Formula

Share Article

Between a rock and a hard place, Social Security and pensions are getting crushed. So what does a person do? Larry R Frank Sr., MBA, CFP®, author of “Wealth Odyssey” explains.

News Image
What is the savings formula?

PRWEB) March 28, 2006 -- The old “three-legged stool” of the past is losing some of its legs and putting more and more pressure on people. Before, the combination of pensions, Social Security and personal savings in retirement plans were what people relied on for retirement. Nowadays, with pressures on Social Security and pensions, it has become even more important for people to focus on the third leg – personal retirement plans – those through employers and IRAs and Roths.

What is a simple retirement savings formula? How can a person judge if they are on track or not? The critical questions people need to ask is: “What is the savings formula?” The savings formula is the amount needed to retire (AMTR) times the withdrawal rate (WR) (called “Wealth Rule” in “Wealth Odyssey”) equals today’s Standard of Individual Living (SOIL), or SOIL = AMTR * WR. Therefore, SOIL / WR = AMTR. There you have it!

SOIL is today’s living expenses – everything you are currently spending to support your standard of living. The starting point is really what you earn – since most people spend all they earn. SOIL does not include what you are currently saving towards retirement. Now, to adjust SOIL for retirement, subtract what you are contributing towards Social Security; this equals your Retirement SOIL. How much of your Retirement SOIL is funded through Social Security benefits and pensions? Subtract these amounts from your Retirement SOIL and you arrive at your Unfunded Retirement SOIL. This is the first number for the simple formula.

The second formula number comes from the “Wealth Rule,” which is the percentage of how much you will withdraw each year to support your expenses. The website explains how to determine this based on your age; 5 percent should be the maximum, unless a qualified advisor has determined some other rate for you.

An example: SOIL is $64,000 income reduced by $4,000 contributed to a Roth, equals $60,000. There is no pension, and Social Security is estimated to be (from their annual statement from Social Security) $12,000. This means the Unfunded Retirement SOIL is $48,000. If the withdrawal rate is 4 percent (.04), then $48,000 divided by .04 equals their AMTR, or $1.2 million. What are your numbers? Everybody is different.

Now, a person knows how much they need to retire with to support today’s standard of living expenses. They can determine if they are on track by comparing how much they have currently saved to this – let’s say $250,000 between a Roth and 401k. So, they still need $950,000 before they can retire. How many years of saving do they have left? Only they know.

Now people can see what they lose in monthly pension or Social Security benefits, they must compensate themselves for that loss by saving more elsewhere – in their 401k, 403b, 457, IRA and/or Roth. How much more? Simply determine the Unfunded Retirement SOIL and do the simple math above.

Here is where it should hit home – people are not saving enough. What elements can they control? Certainly not the stock market! They can control how much they don’t spend, i.e., save more. And, they control how long they work (how long they save), health permitting. But save they must! Studies show that a person will have more money by saving more than trying to get a higher return on lower saving rates. By saving more, this actually helps reduce the problem. Saving more means the SOIL has also been reduced which means the AMTR is reduced as well. An example of this is at .

Today, more so than ever before, people need to understand how to balance their spending today with their retirement income needs of tomorrow. It is a matter of sustainable living. Most people have unsustainable standards of living. Between the lines, people need to understand the ramifications of changing Social Security and pensions. The common denominator for this balance is how much they save towards their AMTR.

With Social Security and pensions between a rock and a hard place, prudent people would save more and spend less in order to sustain their unique Standard of Individual Living into retirement. The world is changing – people need to change with it.


Larry R Frank Sr., MBA, CFP, Author, Wealth Odyssey

Wealth Odyssey

(916) 773-3509

# # #

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Larry Frank
Visit website