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Retirement: How to Know What You'll Need

retirement Aug 30, 2019


When it comes to retirement, there is no one-size-fits-all formula that will work for every retiree out there. So, deciding what you will need to retire becomes a personal journey, almost a spiritual quest of sorts. Only you can decide what you’ll need to live on because only you can decide on exactly what your idea of retirement really is. Are you going to stay in your home or sell it? Are you going to move to a warmer climate or maybe even another country? Are you going to downsize and live a modest life or do you plan on living just like you do now, only with a bit more time on your hands? These are the questions that you’ll have to answer in order to plan for your future retirement needs. However, you do know that you will need some savings. You will probably need quite a bit of savings. Overestimating is probably a good idea because if you fall short of your goal, you’ll probably still be okay.

As I said, coming up with a figure is a difficult task because there is no such figure or formula. The future, unless you’re a fortune-teller, is purely speculation. The main purpose of planning is to get a general idea so that you can set savings goals and get the ball rolling. No one will know the exact amount of cash you will need to enjoy a comfortable and easy retirement, but we can come close.

To begin this journey, I suggest some wine and a quiet evening alone with whoever is going to join you in retirement. If you’re married, this will be your spouse. If you are planning to retire alone, then it should be just you and a glass of your favorite beverage. The point is to be in a stress-free environment where you can let your mind wander without distractions. You are probably going to take notes, so bring a pad of paper and a pen.


Everyone has a different picture in their head of what retirement should look like. Your job is going to be writing down what you would like your retirement to look like. You want a clear picture as detailed as possible. Exactly where are you going to live and in exactly what type of house? Do you want to do yard work or do you just want to relax and let someone else take care of it all? Write it all down, every little thing you can think of. How many times a week do you want to eat out? Will you go out to movies or other events? Will you join a gym or a country club? Write it all down so you can get a better idea of what your expenses will be when the time comes.

Begin by calculating the amount of money you will be spending every month and don’t forget travel expenses so you can visit friends and family if you’re planning on moving away. These are some of the most important decisions you are going to make but don’t worry. They aren’t set in stone. You can change your mind anytime but having a plan in place is far better than no plan at all.

Here are 4 simple steps to guide you in creating your estimate of just how much money you’ll need for retirement. Remember, you can always change things later but writing down Plan A will make Plan B even easier to create. Let’s get started.


1. Estimate Retirement Expenses

Now that you’ve written down your retirement lifestyle, you can estimate your retirement expenses. Take a look at your current budget and eliminate expenses you will no longer have after you retire. Add in expenses you will incur after retirement. You may want to increase health care expenses but cut down on transportation costs if you won’t be driving back and forth to work every day. Maybe you’ll eliminate dry cleaning but increase travel to visit your kids. Don’t worry about how accurate these numbers are. We just want an estimate. How much do you think you will spend each month during your retirement? Estimate the taxes you will have to pay on your retirement income, as well. Some common retirement budget mistakes are forgetting about items that do not come up regularly, like insurance premiums, membership fees, major home repairs, and periodic dental work that you may need in the future. Do your best to think of as many expenses as you can and decide where you want to save money and where you don’t mind splurging. It’s your retirement. You want to plan well.


2. Determine How Much Income You Can Expect from Guaranteed Sources

Get an idea of how much retirement income you will get from guaranteed sources like pensions, social security (although it may be non-existent by the time we retire), and monthly annuity payments that you may be receiving. Once you have an idea of your guaranteed income, you’ll have a better idea of the savings you’ll need. Compare this income with your estimated retirement expenses. Don’t worry. We expect there may be a gap. Normally, though, guaranteed income covers at least half of your estimated retirement expenses by the time you get to the age of 70. If yours doesn’t, you may want to consider buying an annuity to provide additional guaranteed monthly income or you can plan on saving the difference.


3. Calculate the Gap

The third step is to calculate the gap between your retirement expenses and your guaranteed sources of retirement income. For example, if you have $60,000 of estimated annual retirement expenses and $40,000 of estimated guaranteed income per year, then you would need to fill a $20,000 gap per year. In that case, you would need to withdraw $20,000 each year from your own savings and investments. Calculate your difference now: the difference between your estimated annual income and your estimated annual expenses. The difference tells you what you will need to withdraw each year, not what you will need to have saved. We will use a retirement calculator to figure this out.


4. Consider Inflation and Life Expectancy

There are some variables to consider, like inflation, life expectancy, the rate of return on your investments, and your readiness to spend principal. These will have a great impact on the amount of money you are going to need in order to retire. I recommend coming up with two sets of numbers: a best-case scenario and a worst-case scenario. A best-case scenario presumes average to more than average returns on your investment, an average life expectancy, and low inflation. A worst-case scenario presumes below-average returns on those investments, above-average life expectancy, and high inflation. Expect the best but prepare for the worst. If you carry an umbrella, it may never rain but you’re always ready if it does.


5. Use a Retirement Calculator

Plug your numbers into a free retirement calculator.  I really like the one from Excel but you will have to have the Microsoft Excel program to get it and use it. There are many others, however. Your bank may have a free calculator on its website. There are a bunch of free ones online but be careful to never ever put any personal information into any website in order to use one. Don’t use your name, your email, or anything personal whatsoever. Only use numbers and play with those numbers. For instance, what would happen if I sold that old camper and put $5,000 in my IRA, or what would happen if I bought a four-plex and began collecting rent on four units each month? Numbers don’t mean anything when playing with these calculator tools. Just know and remember that any websites that have them are hoping to collect your information in order to solicit you, so don’t enter any personal information at all, no matter what.

The calculator will give you an idea of how much money you’ll need to put away each month in order to reach your retirement goal. If you are planning on spending more money when you retire, you will need to save more. Also, your retirement age is a big factor when it comes to how much money you’ll need. If you are planning on retiring early, you will need to have accounts that won’t penalize you for early withdrawals. Calculators can adjust for many of these scenarios.

Estimating what you will need for retirement can be overwhelming if you are not an individual that likes mathematics. Just be patient with yourself. Think of it as a game of monopoly and find a way around any mental blocks that may come up. In case you need professional assistance, get a good retirement planner. Ask around to see who your friends recommend. You only retire once. Take the time to plan for it carefully.




Michelle R Russell

© The Prosperity Process, LLC  

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