Forget 'If I Had a Million Dollars.' I Want $3M!

If you think you'll need $1 million to retire, you'd better make it $3 million. Setting the stage for financial security in your golden years requires diligent savings starting … yesterday. In order to retire, you need to make careful planning decisions today, says Jocelyn Evans, associate dean of undergraduate programs and finance professor at the School of Business of Charleston College. Part of that planning requires making trade-offs between discretionary spending and saving for the future. In this interview, professor Evans provides insight and advice for retirement planning.

Has the current economic situation changed retirement planning for baby boomers?

Yes. In the past, people counted on stock market average earnings of 12% to 15% a year. Getting a higher return from compounding means putting less into a 401(k), Roth individual retirement account or traditional IRA.

And now the market has changed and is much more volatile. Greater risk is associated with investing in the market. There are a greater number of periods where you have a down cycle in the same decade, so you are not going to get that 12% return. If someone had started investing in her 401(k) in 2000, by 2010, she would have broken even -- she would not have made anything. That is something American investors are just not used to.

In order to compensate for market volatility, many people make less risky investments because they do not trust the stock market, the bond market or the real estate market. These investments yield substantially lower returns. If originally you had to save $400 or $500 a month to meet your retirement goal, you might now have to save $1,000 to $1,500 per month to reach that goal. That is a problem for many people in our consumer-driven society. They will have to cut back on spending and consumption to save that much.

For retirees already on a fixed income, what effects have the recession caused?

The recession has hurt retirees because Treasury bills and notes are paying less than 1%. With earnings that low, many retirees do not have revenue strength. To compensate for lower returns, people may have to move into riskier investment areas that they are not used to, knowledgeable about or comfortable with. This is a time when they cannot afford to lose their principal, but that could very well happen.

How can an individual plan for retirement and determine the total amount he or she needs once retired?

The individual should decide in advance the minimum amount he or she could live off in retirement. Many people think that in retirement, they are going to live the same or better than before. Once they have determined the minimum amount they need, by calculating the time value of money, we can figure out the amount they should have saved by the age of retirement.

Another change is that although historically many people have helped their adult children financially, they may not have the means to do that anymore.

What significant impact has the economic meltdown had on investment plans such as 401(k)s?

Many people are risk-adverse and cannot handle volatility. But not understanding the connection between risk and return can lead to future problems. Risk affects the total amount they can earn for retirement. When it's time to retire, people who haven't planned well are going to be in trouble.

Is there an ideal age retirement planning should be put first on the list of savings?

The younger the better, but there are trade-offs. If you are trying to be a medical doctor, for example, or if you want to go to graduate school, you are consuming and you may be borrowing. As long as you are making decisions that will increase your income in the future, then the ideal savings is a function of your aspirations and your future career. And you may be delayed in beginning actual savings.

But if you get out of school in your early 20s and you have a job that allows you to save, then you should invest as much as possible even though it may force you to trade off between discretionary spending such as expensive cars or trips with friends.

Is there any advice you would like to give to individuals who are planning for their retirement?

Do not underestimate. Inflation will raise prices as much as the market will bear. If you think you need $1 million, you may really need $3 million.

Special thanks to Jocelyn Evans, associate dean of undergraduate programs and finance professor at the School of Business of Charleston College in Charleston, S.C., for joining us in this interview.