Question for the Money Doctors
Question submitted on Apr 26, 2011.
QuestionI received an excellent response to a question submitted by me on January 10, 2011. In retrospect, I did leave out some important details in the original question. My $1.1 million in savings is divided into five different CD''s as a trust with family benificiaries. The bank Valley National, which has a conservative lending policy sparing it from the subprime problems of a few years ago, has certified that each CD is insured up to $250,000 because of the trust designation for each CD. I do agree with the inflation concern, and have not committed money saved the last two years to a long-term CD as I did with the previous money saved ( six years at 3.5 % ). I am single, do not have expensive tastes, could be a case study for the book " The Millionaire Next Door, " have a condominium with no mortgage, plan to work until 65-70 God willing , and will leave my assets upon death to family and charities. That aside, do you think I have a good nest egg here already or should the saved amount number be much higher? I truly appreciate your time and patience.
Assuming your trust is a "living trust" account, my understanding is that FDIC coverage is $250,000 per beneficiary up to a limit of $1,250,000 per bank for each account owner. You should confirm this with your bank to make sure your 5 CDs are all covered under that threshold.
Regarding if you have enough savings for retirement, that depends on your risk tolerance and income needs. Many advertisements suggest investors should target a specific number for their nest egg, however, ultimately that nest egg becomes an income stream so the figure is not an end to itself. I typically use 4% of a portfolio's value as the "safe" annual withdrawal ratio for a retiree to ensure they do not run the risk of outliving their nest egg.
Say you are at $1.2 million now with some other savings on top of the CDs - that would compute to $48,000 annually at the "safe" withdrawal ratio. Obviously we all have clients that withdraw greater than 4% at times or on an ongoing basis, but 4% is the industry standard according to some research done by Bengen in the 1990s. Therefore, if $48,000 annually will cover all of your living expenses, both necessary and discretionary, then you are already in the neighborhood of having a sufficient nest egg to retire. I am leaving social security out of the equation because there is anticipation that the program will see significant modifications in the future. That being said, if your plan is to continue to work until 65-70 you should consider continuing to save any excess funds you are not spending, donating, etc. so those funds can continue working for you while you still have earned income.
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