Economy and Government

BULLS & BEARS: Katrina crisis highlights need for self-sufficiency

September 19, 2005

No one really knows how Katrina is going to affect the economy. Some economists say it will be a whopper of a negative while some are convinced-and convincing-that she ultimately will be positive for GDP.

But based on the fact the stock market, which is the great predicting machine, advanced a couple of percentage points in the week following the disaster, I'd have to go with the positive bet.

The slow response and evacuation snafus were one problem, but the biggest problem I see is that the government is the one cleaning up the mess. We all already know how efficient that's going to be.

We'll see a political feeding frenzy from now until the next elections. Just think how many congressional hearings on the cleanup we can look forward to!

I drew a couple of conclusions from Katrina. First, don't live below sea level. And second, don't rely on the government for your well-being.

The time in most of our lives when we run the greatest risk of relying on the government is during retirement.

If you didn't happen to be born into the right lineage, or if you don't squirrel away enough during your working years, you run the risk of relying on Uncle Sam.

It could be you standing on your rooftop, waving your arms, peering skyward and waiting for the feds to drop down the Social Security check. That's a nice vision isn't it?

How much do you need to avoid living in the equivalent of the Astrodome during your golden years? How much does it take to be self-reliant?

Many, many studies have been done to show how much income can be drawn from a balanced portfolio of stocks and bonds.

Some of the studies assume you will deplete your portfolio during your lifetime. The big challenge with that assumption is knowing how much life you have left.

You would sure hate to run out of money while you are still breathing.

I prefer the studies that show how much you could spend and still have a good shot at growing your principal.

All of them pretty much come to the same conclusion: You can pull out between 5 percent and 6.5 percent of your principal, and look forward to getting some growth over time.

This means you need to take the income you want to live on and multiply it by at least 15, but preferably 20, to come up with the amount of money you will need at retirement.

So let's say your required monthly income is $15,000 and Social Security will throw off $1,500.

That means you'll need $13,500 a month, or $162,000 a year. Multiply that by 20 and you get $3.2 million.

Remember, though, that $3.2 million is in today's dollars. You need to double that for every 20 years of working you have left.

Some retirement planners say you won't need as much income when you retire as you do when you are a working empty-nester. But after 25 years of observing clients of mine, I can't say I buy that argument.

If you want a more scientific calculation than the one above, you can use something called a "Monte Carlo" calculator. You can find basic free calculators on the Web.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, a money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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