What we’ve talked about in Part I & II is a basic application of the time value of money, given today’s interest rates. So, is it time to take up boozing, smoking and to hell with the exercise bike? Maybe.

As a financial advisor, I can provide you with reams of data that suggest, over time, that it is reasonable to assume a 6% real rate of return instead of the 1.5% which I used in Part II. I might do this if you tell me you need $10,000 per month to live your life, and that if 1.5% is the upper limit, then you need a cool $3 million to make this work.

You aren’t likely to have $3 million? No problem! The internet has the answer!

You discover that a financial website has a free retirement calculator! (Why didn’t I think of that?) Just send us your money and we’ll guarantee you 7% per year and at some point in the future, you can begin taking a retirement income which you can never outlive!

How is it possible, in a world where 30 year mortgages cost only 3%, that an insurance company can guarantee a 7% return? Magic, I tell you! It’s magic!

To some degree, its the law of large numbers, which apply to the ageing population but not necessarily to you and me. If 10,000 people buy into the product, some are going to die early, some are going to quit early, and pay a large fee to take their money, and some will stay the course. Meanwhile, the insurance company has possession of your money, can play with hedging strategies and option trading and will almost assuredly come out ahead. I’ve never met an insurance company in my 37 years of doing this that didn’t have a profit motive. Virtually all of them succeed.

But back to the retirement question. If you are willing to take more equity market risk, and scale back the need for security, you can up the interest rate when calculating how much you need and get it closer to what you have or what you think you can manage. Each of us has a comfort level with risk, much of it fixed years ago, when we learned what level of discomfort we could live with and built our lives around that variable.

Here is one of the axioms of financial economics. If you are going to assume a higher expected investment return — like 6.5% — compared to what is available with no risk, then you must also allow for the possibility that things will not work out and you might earn much less than expected.

Average the two scenarios — and account for this risk properly — and you are left exactly where you started, namely the present value of your $1,000 under a risk-free return is $230,000 if you plan to life expectancy and $385,000 if you plan to the 95th percentile.

Assuming a more aggressive rate of return — or planning to some arbitrary age — and then claiming that retirement has suddenly become “cheaper” is a dangerous fallacy. It will end up costing many retirees quite dearly. Ask anyone who assumed a 6.5% investment return over the last decade — or the 100,000 American centenarians — how their retirement is panning out.

All you can do, professionally speaking, is develop a game plan that you and your spouse can live with. Identify all the variables you can, plug in the values that you know exist today, and be prepared to re-evaluate every twelve months or so. And then, when you have identified all the parts, put the plan in motion. If you need help, find someone like me that you can feel comfortable working with, and make it happen.

Stay tuned for Part IV…