Retirement Planning


Retirement Income Needs

Your costs won’t be all that different from now, except you won’t be so worried about saving for retirement! Essential costs typically include:

Length of Retirement

Keep in mind that the length of your retirement is another important factor in your costs. If you determine that you will spend about $50,000 per year, it doesn’t take a math genius to realize that a 20-year retirement would need significantly more funding than one lasting 10 years. According to the National Vital Statistics Reports, in 2003 the life expectancy in the United States reached an all-time high of 74.8 years for men and 80.1 years for women. In addition to the average life expectancy, also consider your personal health and family history when planning your length of retirement.

  • Housing (mortgage, insurance, taxes, maintenance)
  • Utilities (heating, water, phone, Internet access, cable)
  • Transportation (loan, insurance, gas, maintenance)
  • Food
  • Credit cards/debt
  • Healthcare
  • Savings (emergency, vacation, large expenses)
  • Personal spending (clothes, entertainment, eating out)
  • Lifestyle choices (travel, gifts, hobbies)

Although these may all be the same categories you use today, the percentages may be very different. For example, if you have planned well, then your mortgage will hopefully be paid off by the time you retire. (Well done!) In this case, you may be spending significantly less in the housing category. In contrast, your healthcare costs may increase sharply as you age.

Of the categories listed, the last two—personal spending and lifestyle choices—are the ones that you can control the most. These are separated to indicate your smaller, daily choices (a latté at the coffee shop versus a cup of tea at home) as personal spending, versus the larger overall decisions (spending half of your time traveling, golfing or committing to another expensive hobby) that encompass your lifestyle as a whole.

Obviously, if you say you’d like the type of retirement where you travel and partake in expensive hobbies, you’d better be prepared to save for it.

One thing you can’t control is the rate of inflation. Typically, inflation raises the price of goods about 4% every year. (Inflation ranges and the rate over the past 75 years has lingered around 3%, but 4% is a safe, conservative estimate.) So if something costs $100 today, in 10 years it will be closer to $150.

That’s the bad news. But the good news is, your salary will probably also increase at about 4% a year—more if you get a promotion or a big raise. So if you are making $40,000 per year now and plan to retire in 20 years, and we assume an annual increase of roughly 4% over that time, by retirement age you should be making $87,000. Not bad!

Many financial advisors recommend that you plan to live on 60-80% of your income at retirement. If you aim for 80%, you should plan to have a post-retirement income of $102,720 (.80 * $128,400) per year to maintain your lifestyle.

So, if you’re retired, where is this money coming from? That’s what we’ll discuss next.

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