Capital Preservation

The Capital Preservation Model

The Capital Preservation Model is based on maintaining the exact amount of money throughout retirement. Basically, it is based on you having the same amount of money in the bank when you die as you did when you retired. Since the model requires a larger sum of money at retirement timing than the Annuity model, it requires individuals to save more and/or exposing themselves to more risk to obtain higher returns on their savings. For these reason a fewer number of people use the Capital Preservation Model to calculate their retirement needs;

The model requires you to estimate how many years you will be in retirement. This is the number of years from the age you retire until your death. The average life expectancy for a 60 year old American today is 80 years of age; for a woman it is 84. This does not mean that if you are 60 you only have 20 or 24 more years to live. It means that statistically, 1/2 of the individuals age sixty will have passed away by then. For this reason you need to look at your family health history, and your individual health / lifestyle to estimate your individual life expectancy. You should consider adding at least 5 years to your estimated life expectancy to minimize the risk of out living your money.

The step used in the Capital Preservation Model

The following steps are used to calculate the amount of money required to fund your entire retirement along with how much you need to save per month.

Step 1. Calculate your Wage Replacement Ratio (WRR) today using one of the two methods identified earlier (top-down or budgeting).

Step 2. Determine gross dollar needs based on your WRR.

Step 3. Determine your net dollar requirements by reducing your results from step 2 by your Social Security benefits you will receive along with any other savings you currently have.

Step 4. Determine the first annual retirement payment amount by inflating your net dollar requirement in step 3 to your retirement age by the inflation rate.

Step 5. Calculate the amount of money that will be required to allow you to withdrawal your annual requirement amount each year through out your full retirement life expectancy.

Step 6. Calculate additional amount of money required to add to step 5 so that you don't consume the amount of step five (this is preserving the same amount each year).

Step 7. Add the amounts in step 5 and step 6 together to get your "number"

Step 8. Calculate the amount of money needed to be invested per year so that the total amount from step 7 is accumulated by retirement age.

Since the our goal is to help and educate people, we have created an excel model that you can use for free. Just click on the link on the right

The Financial Swami has made it simple for you; just use the link below to pull up a worksheet that will do the math for you.

Capital Preservation Model Worksheet

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