Retirement planning has changed over the last decade. There is a lot more to retirement planning today than simply saving money. Millions of Americans worry they will not have enough money to live comfortably once they stop working. The decisions you make today will have an impact on how you live tomorrow. There are many issues to consider as you approach retirement. How much should you save each year while working? At what age should you stop working? Should you work part-time for a while? What sources of income will you have once you are no longer receiving a paycheck? Should you withdraw money from your taxable account first or from your IRA? How would you like to enjoy your retirement? How much will you spend each year? Where will you live?
Perhaps the most difficult question is how much do I need to retire? This is a difficult question because it doesn’t have a simple answer. The answer varies from person to person depending on retirement spending needs and available post-retirement income. Your needs may be completely different from those of your friends or neighbors. One way to estimate your needs is to look at your current income. The old rule of thumb was that you would need 80% of your pre-retirement income during retirement. So, if you were earning $100,000 per year prior to retirement, you would need annual income of around $80,000 afterwards to maintain your lifestyle. This old rule assumed you would need less income in retirement because you would have fewer expenses. You would no longer have a mortgage, children to support, or commuting costs, for example. The problem is that these are pretty broad assumptions. Research shows that some people spend just as much, or even more, in retirement than they did while working. They may travel extensively, buy a second home, take up an expensive hobby, or face a serious medical condition that significantly increases their health care expenses.
Thus the 80% rule of thumb is just a starting point. It is important to look at your unique circumstances in gauging your retirement spending needs. What will your expenses look like? Will you pay off your mortgage prior to retirement? Will you move to a cheaper place to live, downsize your home, or make any large purchases? What is your life expectancy (how long does your money need to last)? On the flip side of the coin, you also need to consider your sources of income once you are retired. Will you receive a traditional pension? What is your estimated Social Security benefit? Do you expect to receive an inheritance? How much have you saved for retirement in your taxable account, IRA or employer retirement savings plan? Once you’ve tallied your expenses and expected income, you then have to account for inflation. By comparing expected income with desired spending goals, you will get a good idea of how much, if any, your portfolio will have to supply in the way of annual post-retirement income.
This may seem like a daunting task but your Dowling & Yahnke investment advisor can help guide you through the necessary steps and develop a plan that will meet your goals. Depending on how close you are to your last paycheck, you may need to save more than you have been or you may need to reduce your retirement spending expectations. We conduct a thorough retirement analysis for our clients to gauge where you are relative to your objectives and whether you need to make any adjustments to increase the probability of reaching your goals. If you haven’t already taken this important step, let us create a retirement plan for you.