If you want to be part of the elite senior demographic – those who live well off savings and investment income instead of a salary – you’re gonna have to do some planning and some calculating.
Getting to what we call financial freedom doesn’t often happen by accident. And, if you’re not there yet, your plan will need to be aggressive.
Note also that you’ll be in the minority. A 2010 AARP survey titled “Approaching 65…” revealed that of the 76 million baby boomers, born between 1946 and 1965, 70% expected to work until 70 or beyond but only 46% were actually working at age 65 (31% working full-time). During the “Great Recession” of 2008/09, and on into the “jobless recovery” disability claims soared as older workers’ health related issues forced them out of the workforce, probably for good.
And, if you want to maintain or improve your health (the top concern of senior surveyed), you need to be able to pay for high quality food, personal trainers, and wellness services not covered by medical insurance. Yes, more money can buy you better health!
Opinions vary on how to calculate the amount of investable assets you need to accumulate to be financially free in the senior years so you may develop a range rather than an exact number to shoot for while you’re still in mid-life.
#1: How Long Do You Plan to Live Off Your Assets?
First, you need a reasonable estimate of your life expectancy. Lucky for us, some scientifically accurate calculators have been developed and deployed via the internet, for our use.
My preferred site currently is www.LivingTo100.com Their process falls in-between simple statistics and highly customized if you’re willing to spend about 10 minutes answering 40 questions about your health and family history. It also comes with some suggestions for extending your number and you can create an account and redo the quiz periodically.
#2: Make Your Income-Outflow Timeline
Simplistic post-employment calculations base your future needs on current income but we think that’s a cop-out. You need to make some estimates based on where you want to go instead of where you’ve been (unless you want things to stay exactly the same).
Your timeline starts now (or even a couple years back) and runs 5 years past the longevity estimate you got in step one. A spreadsheet is good for this exercise – put your ages in the column headers and your income and living expenses in the row headers.
Cover all the current and potential future living expenses in 3 top level categories:
>> Absolutely Necessary
food, shelter, medical care, transportation, communications
>> Some Leeway
eating out, entertaining, gifts, new clothing, visits to family/friends
>> Completely Discretionary
tourism, sports, hobbies, recreation, education, charitable giving
Start with your current budget and spending habits and try to project how they will evolve over the next phase of your lifetime. Spreadsheet formulas (or a calculator) help you factor in inflation. Use 2 or 3 percent overall or break price inflation out by category since your basic living expenses will probably rise much slower than your health care expenses.
Or, if you want a quick (but less accurate) estimate, go ahead and use one of the salary based methods:
>> Either 12 times your current salary:
you’ll need $600,000 in assets for every $50,000 in salary or
>> Replace 80% of your highest salary:
for each $50,000 in salary to replace, you’ll need to generate $40,000 a year in interest.
If you make a 4% return on assets, each $1 million invested will cover $50,000 in salary.
If I was you, I’d go with the higher number since it means you’ll never run out of money (you won’t be living off the principle). But, if you trust your children to take good care of you when you’re super-old, you may be able to get by with a lower number.
There are also internet based calculators for estimating your number – look at the assumptions used before you place your faith in them. Plus, if you don’t know what you want to focus on post-working life, or how to create income from your assets, you can end up with a number that’s way off base.
TaDa – you’ve now got a target number for the income producing assets you’ll need to fund a financially free senior lifetime!
How to accumulate those assets is a topic for another time but, just knowing your number gets you a lot closer to achieving financial freedom than most people – congratulations.
If you’re ready to go deeper, the Financial IQ test is ready for you at: www.MoneyDivaIQ.com . Rate yourself in 5 categories, 25 questions total, and see where you are now and get personalized suggestions for achieving financial freedom.
Live Long and Prosper, Leah, the MoneyDiva.com