At the end of the day we trade to make more profits.  Seems like a pretty clear cut goal, yes?  But "making more profits" is often mistakenly the end goal when in fact, it is a piece of the larger picture: being able to retire when you want with the monthly income you want.  No one wants to be 70 years old and still HAVE to be working full time, or even part time.  And yet, when people think about their trading and investing, their only goal is to "make more" without knowing HOW MUCH MORE IS NEEDED.

​

Over my 30 years managing money regardless of the size of the starting asset base (401k's, IRA's, 402b's, etc.), in almost every single case, the client did not have any idea how MUCH growth was needed.  In almost every case the client was taking on too much risk without regard to what was the correct level of risk.

​

So, is there a way to compute how much risk you should be taking with your retirement accounts?  Well, I am glad you asked because there is.  And you don't need to be a financial planner or retirement planner.  Here's how to do it:

​

In order to begin this computation, you will need to know a couple of figures:

• The total balance of your retirement assets.  Let's call this "CRA."

• The number of years to your targeted age of retirement.  Let's call this "TA."

• The desired monthly income at retirement.  Let's call this "MI."

• The expected amount you will receive from Social Security (or other government controlled retirement benefits).  Let's call this "SS."

​

Before doing an example computation, there are a couple of caveats: 

• This is an estimate only and not meant to illustrate exact figures.  

• This is meant to show you if you are "in the ballpark" regarding your retirement goals.

• Ultimately, this is meant to show you approximately what annual return is needed which thereby guides how much risk you need to take, which then can guide you which assets to invest in.

• This method assumes a 5% yield on investments at the time of retirement.

​

EXAMPLE:

For this example we will use the following assumptions:

• CRA = $100,000

• TA = 20 years

• MI = $4000

• SS = $1500

​

To arrive at the return all we need to do is follow these steps:

1. (MI - SS) x 12 = Annual target income at retirement (ATI)

2. ATI / 5% = Lump sum amount needed at retirement to generate the ATI assuming a 5% annual yield; Let's call this "LSum"

​

Let's use the assumptions from above:

1. ($4000 - $1500) x 12 = $30,000 (ATI)

2. $30,000 / 5% = $600,000 (LSum)

3. Using a compound rate of return calculator (Investment Calculator). It will require you to modify the Return Rate input to arrive at an End Balance close to your LSum.  In this example, a 9.4% rate of return over 20 years to achieve a monthly income of $2500 ($4000 - $1500) or an annual income of $30,000 (ATI).