Alexander Sonkin is a former member of the Chicago Board of Options Exchange, Chicago Board of Trade, Chicago Mercantile Exchange and currently an asset manager for the ultrahigh-net-worth clients at Capital Consulting Company.
Mark Stevens is a best-selling author, CEO of MSCO, a management and marketing firm, and a popular media commentator. Stevens’ firm represents clients such as Nike and Virgin Air. The best-selling author of Your Marketing Sucks, his latest book is Rich is a Religion.
Dennis O’Brien founded Coastal Financial Advisors Inc. after several years of working in the technology industry at firms such as Bell Atlantic and AT&T Labs. He speaks on a variety of wealth-related topics, including retirement and real estate planning for individuals and families.
I’m 50 and not saving as much or as quickly as I’d like for retirement. What can I do to retire comfortably at age 65?
Dennis O’Brien: Take a look at your budget and make sure you’re maximizing your potential savings. If you find that there’s truly no room to save any more, start thinking about reducing your expenses.
Trimming costs may be as simple as cutting back on extras, such as going out to dinner or other recreational activities. Or it may be as drastic as moving to an area that has a lower cost of living—which includes possibly moving out of your current state. If you think a move may be a viable option, make sure you weigh this option against your style of living. If you live close to family, for example, this may be a difficult choice to make.
Alternatively, you may be able to pick up a part-time job and make additional income for a few years to make up for the lack of savings in your earlier years.
Individuals who are closer to retirement (known in the financial services industry as "late-stage" savers) should be saving the maximum amount allowed in a 401(k) program, and should place additional savings in an IRA account if they have not reached the IRS income limits.
One thing you probably would not want to do is retire early. Retiring early will reduce your Social Security. If you do not have a pension and have limited savings, Social Security becomes your only source of income.
I’m 30, and I want to plan for retirement and to put my two kids (now 4 and 6) through college. How do I know how much to save to get there?
Alexander Sonkin: If your kids both get full scholarships, then all you have to focus on is your retirement. If you are not that lucky, then we have to consider that a college education costs as much as $30,000 per year in 2008, and that cost is rising at about 6.3 percent per year. In 15 years, the cost should more than double to approximately $65,000 per year. For two kids, you are looking at $520,000 for a four-year university education. To plan your retirement, figure out how much you need to live comfortably today: Let’s say that amount is $100,000 per year. Inflation is running about 4 percent per year, so if you plan on retiring in 35 years when you turn 65, you will need $400,000 per year to maintain your current standard of living. Figure that you will live until the ripe age of 95; that means you will need 30 years of $400,000 yearly income. You will need to save approximately $18,000 per year for the next 15 years, earning 8 percent per year, to cover the educational costs of your children. You will need to save an additional $38,000 per year for 30 years, earning 8 percent, so that you can withdraw $400,000 per year in retirement.
Mark Stevens: You’ll have to begin with some projections:
How much will it cost to send your kids to college once they’re college age? A host of college funding Web sites can help you with that.
How much money will you need at retirement to live the kind of lifestyle you will choose at that time of your life?
It may seem like you’re looking forward many years, but the date will sneak up on you faster than you ever dreamed possible. Whatever number you arrive at now, play it safe and increase it by at least 50 percent and make certain that the key target you’re looking at is the principal sum you create that can throw off sufficient earnings without invading your principal during the retirement years. The best retirement begins with the peace of mind that the "money’s in the bank."
As the cost of living increases, fuel prices increase and the stock market is in flux, is there anything I should be doing differently with my money?
Alexander Sonkin: By analyzing what the most successful investors have been doing as compared to the average investor, we find dramatic differences. The most successful investors seem to utilize nontraditional strategies. Some of them are even counter-intuitive. However, they work consistently over time with outstanding risk-reward ratios. Our wealthiest, most sophisticated clients do not invest in mutual funds or the stock market, and they are therefore not affected adversely when the markets underperform. They have a significant percentage of their assets in safe, liquid investment vehicles, like maximum-funded life insurance policies (where the returns are linked to various stock market indexes with a guaranteed minimum return—this creates a predictable return of 9 percent or more with zero tax consequence) or highly rated bonds. They balance their portfolios by investing other resources in real estate or private businesses within niche markets—that they thoroughly understand. They never invest in something unless the outcome is highly predictable.
How do I know how much money I need to start a small business?
Mark Stevens: The so-called rules of startup financing have changed in recent years. Now you can launch a small business on the Internet with no brick and mortar, no employees and no inventory. If you are open to any type of small business, I suggest you start here. The sale of everything online is still exploding and the cost/risks are greatly diminished.
If you have a specific non-Internet business in mind, the answer to "how much money will I need to start it," is more than you think. You’ll have to budget for facilities, labor and marketing—and double it all. Remember the old axiom, whatever can go wrong, will.