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Before You Retire, Try Rehearsing

How do you know how much money you can afford to invest? Or whether you've accumulated enough money to retire?

Most of us struggle with questions like these from time to time. Occasionally, we crunch some numbers to try to approximate some answers, but often those answers leave us feeling more uncertain and anxious than when we started.

Scott Anderson

In the most extreme cases, paralysis sets in and we fall further behind on our investing goals.

One solution is to take fear out of the equation and replace it with a quotient of fun, says Holly Kylen, a Lititz, Pa., financial adviser. Her recommendation to clients who want to know if they have enough money to retire or whether they can afford to risk $10,000 in an emerging-market exchange-traded fund: Go home and play.

As a retirement coach for ING Financial Partners, Ms. Kylen has seen many an investor reduced to tears at the mere thought of losing money on an investment or running out of funds in retirement—so many that she keeps a big box of tissues on her desk.

So about 10 years ago, Ms. Kylen came up with a game that has clients simulating their financial plan before implementing it. "If you simulate it," she explains, "the fear melts away." You also learn whether and how the plan might need to be tweaked.

Take the husband and wife, both 60 years old, with a combined income of $100,000. He'd just had knee surgery so his days as a factory supervisor were numbered. She was a kitchen worker for a school district that was offering early-retirement packages.

Ms. Kylen estimated that, based on the couple's pensions, Social Security and savings to date, they could retire at age 62 on $50,000 a year.

But could they live on that?

"It'll never work," said the wife, panicked.

Ms. Kylen sent them home to play the retirement game.

For the next six months, they pretended they only earned half of their actual income, piling up the balance in a savings account.

To the wife's amazement, the smaller income turned out to be more than enough for their "have-to" costs, such as utility bills, and their "want-to" costs, such as entertainment. The grateful husband presented Ms. Kylen with a box of chocolates.

One retiring corporate executive and his wife came to the opposite conclusion, deciding they wanted more income than their investments could produce. For one thing, they wanted to be able to continue taking their grown children and grandchildren on a cruise every year.

They decided to sell their million-dollar house (which prior to playing the game they were adamant about keeping) and buy a smaller one. This freed up $500,000 to invest.

The husband also decided to continue working part-time. "He really doesn't have to work," says Ms. Kylen, "but he has to do something more for the lifestyle he wants."

There are simulation games for new investors, too. Take the 22-year-old kindergarten teacher who wanted to start investing some money outside of her 403(b) retirement plan at work.

Ms. Kylen explained that she would need to set up three buckets of money: one for emergency savings, one for medium-term savings for a house or a car, and one for long-term investments.

But how much money could she afford to put in each bucket? The teacher didn't have a clue.

Based on her professed expenses, it looked like she was clearing about $500 a month. So Ms. Kylen had her stash $200 a month in a savings account temporarily and try not to touch it.

After three months, the teacher checked in. Did she touch the money and, if so, why? Yes, she had to raid the account once, for $50 to cover the cost of a visit to a walk-in medical clinic.

Ms. Kylen had her step down her savings to $150 a month and repeat the exercise for three more months. Eventually she settled on $125 a month—$50 for her emergency savings, $50 for her medium-term savings and $25 for her long-term investing.

"It's a powerful thing to simulate before you act," says Ms. Kylen. "It gives you the confidence and sometimes the push you need to do what you've got to do."

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