by Archie M. Richards, Jr., CFP^®
November 5, 2001

During the 1990s bull market, Jim plowed over $700,000 into so-called growth stocks. But the prices plummeted to earth, cutting the values to only $100,000.

Jim makes a good buck: $80,000 a year. He plans to retire in ten years at age 65 and wants a portfolio large enough then to generate $50,000 a year. Starting with $100,000 and with only ten years to go, this is a tall order.

Jim must not increase his investment risk. He must instead save every penny he can. Here's how he goes about the planning:

To provide the $50,000 after retirement, Jim figures he'll withdraw 6 percent of his capital each year. This would require $833,300 ($50,000 divided by 0.06). In the first years of retirement, when he's especially active, he'll withdraw at the rate of 7 percent. Later, he'll simmer down to 5-percent withdrawals.

Jim goes to www.yahoo.com and searches for "java financial calculator." This enables him to determine how much to invest each year to end up in ten years with $833,300.

Jim assumes 8 percent annual growth of his investments, after taxes. Where the calculator asks for the "rate of interest," he inserts 8.

The number of periods is 10, for ten years.

The "present value" (pv) is minus $100,000. This is the amount Jim starts with. (Amounts added to investment programs appear in financial calculators as minus numbers.)

The "future value" (fv) is $833,300. This is the amount Jim needs in ten years - a positive number.

To find the amount he must add to his investments each year to end up with $833,300, Jim presses the "payment" (pmt) button.

The answer is $42,619. Ooof! That's a sock in the solar plexus! With less than $65,000 to work with after tax, Jim can't set aside two-thirds of his discretionary income every year. No way. Retiring in ten years won't work.

Okay, Jim assumes retirement in 15 years, at age 70. On the calculator, he changes the number of periods from 10 to 15.

The extra five years make all the difference. To reach his goal of $833,300, Jim must invest $19,007 every year, about 30 percent of his net salary. This he can handle. He'll invest as much of the money as possible in tax-advantaged retirement programs. If he can set aside more or if the investments perform better than expected, he'll retire sooner than 15 years.

Never again will Jim concentrate his money in a single kind of investment, especially not in stocks that are considered "sure bets." Instead, he'll use an asset allocation program, as follows:

• 30 percent into a broad-based index fund of U.S. stocks;

• 30 percent into a broad-based index fund of foreign stocks, worldwide;

• 20 percent into an index fund of REITs;

• 20 percent into an index fund of long-term, U.S. corporate bonds.

Jim sets ranges within which these investments can fluctuate in relation to the whole portfolio:

• 23-to-37 percent of the total for the two stock funds;

• 15-to-25 percent of the total for the REITs and bonds.

Once a year, he'll check the values. When a sector exceeds the top of its range, he'll sell some of it and invest the proceeds in sectors that are underperforming.

Jim has two advantages: He knows what he has, and he knows what he wants. If he were uncertain about either of these things, he would consult with a financial planner, one who uses asset allocation and doesn't try to outguess the market.

To recover from his investment calamity, asset allocation with annual rebalancing should provide Jim with excellent prospects and modest risk. But the key is, he must save as much as he possibly can.

High Moral Standards Department: To support out-of-control compulsive shopping, Elizabeth Randolph Roach stole nearly a quarter of a million dollars from her employer. Out of sympathy, Judge Matthew F. Kennelly, of Chicago's Federal District Court, spared her an 18-month prison term. Elizabeth's addiction to shopping, he explained, helped to "self-medicate" her chronic depression.

If you're feeling depressed, go to Chicago, steal money, go wild, and arrange to appear before muddle-headed Judge Kennelly. Maybe you'll get away with it.