What is a sustainable withdrawal rate for your personal financial lifestyle, now and into retirement?

Big words that simply mean, will you run out of money, and if you think you might about when will that happen?

Are you ready? Those who are well versed in using Electronic spreadsheets can set this up in a jiffy. (Should I claim patent rights?) Not really, since simple generic calculators are available on the web. This one should help you mix and match more freely.

No access to Excel spreadsheet wizardry? Do this exercise with a hand-held calculator or good old math to approximate results. You will, however, need to have a fair comfort level with compound yields. If you are math-timid (and millions are) find a maths whiz friend.

First assumption ? you will be retiring within months at age 65, so you can count in your Contributory Pension or equivalent. You also will not be working at any job. You have earned your retirement and you are just going to chill out.

Net General Income Formula calculates the income you will receive from pensions that are annuitised ? don't count any lump sum payments here as they are included in your beginning capital investments. Those of you eligible for the Government Contributory Pension (and I hope you all are ? when was the last time you checked your record?) add that in.

Other income. If you have rental income or some other type of income derived from property holdings or loans, etc. add that in. Do not add in interest/dividends from your portfolio. That will be calculated with the capital section by using an average interest rate for your whole portfolio.

General Living Expenses. I won't cover again the first two articles regarding issues of longevity and the General Living Expense calculations. I will assume that you have come up with a fairly accurate estimate of your normal every day living expense, and that as discussed prior that you have set aside the cost for your special goals, such as travel, a new car, grandchildren's education etc. It is very important to keep those special items separate as you will see from the charts. Te assumption that for two people the cost of living including, health insurance, is $60,000 per year.

Inflationary Pressures and your Personal Family Inflation Rate*** (see chart). You cannot forget the effects of inflation. If you do not build in for its effect, your calculations five -ten years out will be way off. Consider that services and products costing $60,000 today will cost at least 4% more next year and the year after and after and after. With health insurance increasing an average of 18% per year (estimated at $12,000 major medical per year for a couple 65 and older), your personal family inflation rate on $60,000 actually will be around 6.8% on an annual basis. (multiply Total General Living Costs each year by 1.068). If you are able to spend more (because you have saved more) that inflation factor will be somewhat diluted.

Subtract estimated cost of General Living expenses today. Your Net General Income shortfall is $19,000 per year. This amount will be needed to augment your lifestyle with the earnings from your portfolio.

Estimated Depletion of Savings. Place your beginning lump sum savings at the top of year 2005. Calculate the interest earned. Being very conservative, low interest rates have been used - if you achieve more, it is all on the plus side. You cannot afford at this stage (for most of your portfolio) to take exaggerated risks in trying to hit high interest rates. Add the interest to your nest egg.

Now subtract your net (negative) general income need from your portfolio by the year, inflating that need each year by 6.8%. Year 2005 was an adjustment year and you did not have any special goals that required a significant one-off expense. Ditto for year 2006, but in year 2007, you took that special trip. Remember that the cost for that trip in 2004 will be quite a bit more in 2007.

You can run this scenario out for as many years as you like. You can try different interest rates for your portfolio. What you won't be able to reduce (much) is the inflation effect in Bermuda. It is here to stay.

If you have other special goals or even if you'd like to extrapolate health insurance separately from your general living expenses you can do so, with the assumption that you want to try to reduce that expense. It is important to remember a couple more things. I have assumed that your private pension, old age pension and rental income will also be indexed upward for inflation - at least a bit.

Annuities that are non-indexed decrease in purchasing power every single year.

What happens if your portfolio isn't earning enough? Based on this set of assumptions, this composite couple may deplete their savings in the year 2017. Could they still get by? Perhaps, with a lot of ifs.

The difference between subsistence and quality living is planning now.

The chart is prepared on a composite basis from estimates alone. Every single person who reads this article will have a different financial profile than the generic assumptions that I have used. The author makes no representation that it is totally factual, attainable or can be relied upon as is, nor am I responsible for your calculations or estimates or ultimate results. It is your responsibility to review your own situation thoroughly and if you are not comfortable with your results to seek the services of a qualified (Certified) financial planner to help you in planning for your retirement. There are experienced licensed professionals available in this field in Bermuda to assist you.

Next week ? Let's consider Alternative solutions.

Have questions on your situation? Give me a call at 299.5578 ? I care and want to see clients maintain self-sufficiency.

Martha Harris Myron CPA/PFS CFP? is a Bermudian, and VP, Investment Centre, Bank of Bermuda member HSBC Group, providing investment advisory services and planning. She is a NASD Series 7 license holder, formerly owning a US financial services practice of individual and corporate clients. She can be reached at 299-5578, or confidential email can be directed to marthamyron@northrock.bm

The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy or sell investment products, or for financial plans. The Editor of The Royal Gazette has final right of approval over headlines, content, and length/brevity of article.