As baby boomers approach and reach retirement age, there’s a lot of anxiety regarding whether or not they will have enough financial resources.

Many somewhat simplistic formulas have been applied to this question, each of which is at least somewhat useful — but each falls far short of doing the whole job.

Example: You can afford to retire when you have investment assets equal to (fill in the blank) times your current cost of living. This is good because it focuses on replacing a pre-retirement cost of living. But it doesn’t take other assets, obligations, income and uncertainties into consideration.

There’s really no way to get a good answer to the question without rolling up your sleeves and asking yourself some probing questions. Questions like these:

  • If I could continue my current income for the rest of my life, adjusted for inflation, would that be enough to meet all my anticipated needs in retirement?
  • If I retire now, how many years do I need my investments to support me?
  • Is it OK with me to use up all my investments by the time of my death, or do I want to provide for others in my will?
  • Am I really able and willing to scale back my retirement lifestyle, if necessary, should my investment returns fall short of my expectations?
  • Alternatively, can I reasonably count on being able to work part-time, if necessary, to make ends meet?
  • How anxious will I be if I plan to have my retirement income vary from year to year depending on how well my investments perform?

That’s a lot to think about.

Over the years I have found that it’s helpful for people to study some tables of numbers that show hypothetical investment returns and withdrawal rates.

Imagine, for example, that it’s 1970 and you have just retired with $1 million in your portfolio. You have properly diversified your portfolio to include much more than just the most popular asset classes. You will withdraw $50,000 in your first year of retirement (a 5% withdrawal rate, in other words) and you will increase that amount every year based on actual inflation.

Imagine the million dollars in savings is invested entirely in a portfolio of bond funds. Or imagine it’s invested entirely in the S&P Index. Or imagine it is invested in some combination between the two.

Even with a million dollars it’s possible to fun out of money when withdrawing 5% depending on how the money is invested, whether or not the portfolio returns were sufficient (or insufficient) to keep up with the withdrawals.

So some general observations would conclude that a retirement portfolio based on at least 60% in stock had a better chance of lasting longer (through 2014 for the person retiring in 1970).

To support a reasonable expectation of continuing much longer beyond 2014, the portfolio would need to be invested at least 70% in equity funds. And yet, the level of risk in such a portfolio is greater than most retirees can or should take.

I realize that 45 years is more than the life expectancy of most retirees. But if you expect a portfolio to continue to support a surviving spouse or to end up with enough to make significant gifts, some extra margin is necessary.

So it’s reasonable to conclude that this plan — 5% withdrawals increased every year for inflation — is less than ideal for most retirees.

Fortunately, there’s a better alternative. By simply changing from a 5% withdrawal rate to a withdrawal rate of 4% it’s nearly impossible to outlive the money.

So the key is to not just save enough to replace 70% or more of your income but live wisely enough to live on 70% or less. If you retire debt free and have the ability to take less than 5% withdrawal rate the money should last.

So the original question remains: Do you have enough to retire? Obviously that depends on whether you want to retire with “just enough” or with an extra measure of assets so you’ll face less risk and less stress.

If you retire with only enough, you face several major risks. One is that, like many retirees, you will want or need to withdraw more than is prudent. Another is that you will invest your money so conservatively that your returns will struggle to keep up with inflation.

On the other hand, you run the risk of investing too aggressively, trying to make up for inadequate savings; if you do that, you may have an awful time getting through normal market declines.

This is a tradeoff, and the choice is entirely up to you. My recommendation won’t surprise you: If you can, save more than “just enough” before you retire.

And please aim to retire debt free.