A MoneyDiva.com Special Report:
Your Fabulous Retirement... Step #1:
Planning for retirement can seem like having a second job! And one with an annoying, overbearing boss (tick-tock...) at that.
There’s no denying that creating and executing a plan for the last quarter of your life takes some time and effort but it doesn’t have to be so overwhelming.
By following this step-by-step guide, you can relax, knowing you’re on the right path, headed towards a secure and prosperous retirement.
The Truth About Your Retirement Income Needs
How much income do you want from your retirement funds?
"A lot" or "as much as possible" aren't going to get you what you need.
Like any goal, the more specific you are, the more likely you are to obtain it.
So, step #1 in planning a successful retirement is: find your NUMBER:
>> The $$$$ you need in your investment account when you start your fabulous 25, 30, even 35 or 40 years of retirement.
To find your NUMBER, you'll need to know these 3 things:
- Anticipated expenses during retirement.
- Projected income from Social Security** or other government programs. ***
- Expected income from pensions and annuities you are vested in.
The difference between:
A) what your retirement lifestyle will cost, and
B) your projected income from pensions and programs, =
C) what you'll need from your savings and investment accounts each year of retirement.
** If you're not sure how much you're entitled to from Social Security, check with (open an account) at: SocialSecurity.gov/myaccount/
*** Readers outside the US will need to contact their pension and benefit providers to verify any expected retirement income.
We all know making long-term plans includes a fair amount of guesswork but just taking a stab at it puts you in an elite minority of future retirees who know what they want and need.
As we start to develop a plan, future expenses are the biggest variable. To simplify getting a realistic estimate of retirement income needs, you'll start by comparing your (projected) retirement expenses to your current expenses.
Use one of these three methods to estimate your expenses (and how much income you’ll need) in retirement:
1. Take a quick quiz (1st Tab below)
2. Or, delve into the nine major expense categories and estimate increases or decreases in retirement (Second Tab)
3. Gather your current data (income, taxes, expenses) and use the retirement ratio formula to find your target (3rd Tab)
- 1. QUIZ
- 2. CATEGORIES
- 3. FORMULA
Retirement Expenses Quiz
1. Will your mortgage (or rent) payments change?
My home will be mortgage free.
The mortgage/rent won’t change much.
I plan to increase my housing costs.
2. What will you pay for health insurance and treatments?
I expect my payments to decrease.
My medical costs should be similar.
My insurance and out-of-pocket will increase.
** Unless you have access to a guaranteed, low cost health insurance program (or plan to relocate to a country with universal coverage), most of us can expect a rise of 5% or more per year in medical costs over our lifetimes!
3. How much debt will you carry in retirement?
I am (or plan to be) debt-free by retirement.
I’ll continue making my regular payments.
I plan to borrow more money while retired.
4. What kind of major purchases do you anticipate making in retirement?
Little or none - my home and car are fine.
I’ll need to replace cars and appliances.
I plan to upgrade after I retire.
5. How much (and what type) of travel will you want to do during retirement?
Not much - I’ll let the world come to me.
I enjoy getting out to see folks.
I’ll finally have plenty of time to see the world!
6. What do you plan to spend on hobbies, gifts and other recreational activities?
Not so much - I’ve got what I need.
I plan to maintain my activities and giving.
More time means I’ll spend more on recreation.
7. Will you continue to provide financial assistance to children and/or parents?
No - they’ll be able to take of themselves.
Some - they count on my help.
More - I’m wealthy and they need help.
Retirement Income Quiz Score:
IRR (Income Replacement Ratio):
Zero - 1
2 - 4
5 - 8
9 - 12
9 Expenses that Change as You Age:
There are nine major expense categories that vary with each individual’s situation and desires. Analytical types will work through a best-case, worst-case and average for their future expenditures. They’ll also factor in the three general phases of a retirement lifetime: early, middle and late stages when your mix of these major expenses can change dramatically.
Whether you start with one general estimate based on your current expenses or make several variations, be sure you factor these into your plans:
TAXES - usually one of your highest expenses, you just might not notice since they’re deducted from your paycheck!
At the federal level, you’ll get an additional deduction when you turn 65 and many states also up your deduction or completely exclude some pension income.
Social Security and Medicaid taxes combine for 8% - 10% or more of most wage-earners’ gross income. Those stop when you stop earning income (tho some Social Security payments are taxable).
RETIREMENT SAVINGS - if you’ve been diligently saving 10%, 15% even 20% of your gross income, you can reduce your retirement budget by a corresponding amount.
HOUSING - many older people are able to downsize their living space. Once kids are grown and out on their own, the expense and burden of maintaining a large home make moving into smaller quarters attractive.
Or, if you complete paying off your primary residence mortgages, you’ll only need to account for taxes, insurance and maintenance expenses in your retirement budget.
But remember, your heating and cooling bills may increase if you spend a lot more time at home!
DEBT SERVICING - more retirees are carrying their consumer and medical debts into retirement. And, if you’ve got a substantial retirement income, you won’t have a problem finding lenders who will gladly help you get into and stay in debt.
According the the Federal Reserve, the average household debt repayment has dropped from a 2007 recession high of 13.2% of income to 9.9% of 2014 income -- that’s still nearly 10% of the average budget.
If you start a debt repayment program that involves paying off the highest interest loans and stop accumulating new debt, you could knock another 10% off your retirement income needs.
EDUCATION - are you helping send kids or grandkids to school? There’s a big expense that decreases or goes away altogether when you retire!
WORK RELATED - do you wear business suits to the office? Commute? Give gifts to a gaggle of co-workers? Even your morning cuppa joe gets cheaper when you make it at home instead of stopping at Starbucks everyday.
HOUSEHOLD SERVICES - this may go up or down, depending on how much help you’ve been hiring. It will also vary as you go along. Maybe you enjoy doing the yard-work or the dusting now that you have more free time but as you age you may not be able to continue keeping up with the chores.
HEALTHCARE - as we noted in the quiz, even with Medicare we’re going to need to allocate an increasing amount to maintain insurance coverages and pay non-covered expenses. Healthcare inflation has run well above the core rate of inflation for most of our lives. While it may level off, this expenditure is too important for maintaining your standard of living to ignore.
The most recent projections I’ve seen say that a 65 year-old couple needs to allocate $220,000 over their retirement lifespan for medical and health related expenses. AARP hosts an online calculator where you can get a more customized estimate based on your answers to some health related questions. Start your own estimate of retirement health expenses by clicking the AARP button above.
Also, If you’ve not yet calculated your longevity, I recommend you spend a few minutes answering the questions at www.Livingto100.com and get an idea of how long you need to plan on living!
- ENTERTAINMENT - this is where you can plan to spend a bit more in early retirement and then scale back as you age. It’s also very discretionary. If you hit your high-end account balance target, feel free to indulge. If you’re a bit short, postpone that big 70th birthday blowout!
And, for Our Math Lovers…
If you really like formulas and spreadsheets, gather the following figures and calculate the ratio of your current income you’ll need in retirement:
Gross Current Income (GCI)
Current Income Taxes (CIT)
Savings from Current Income (SCI)
plus or minus
Net Change in Expenses (NCE)
Retirement Income Taxes (RIT)
Gross Current Income (GCI)
equals yourIncome Replacement Ratio (IRR)
(GCI - CIT - SCI +/- NCE + RIT) / GCI = IRR
Now you can find the total income you'll need in retirement:
Multiply IRR by your current income. Subtract any pensions and programs income you can count on receiving, and the balance is the amount of income you'll need from your savings and investment accounts.
Now, multiply your current income by your IRR.
If your current income is $100,000,
and your IRR is 70%,
That's ($100,000 x .70) = $70,000.
Subtract any pensions and programs income you can count on receiving, and the remainder is the amount of income you'll need from your savings and investment accounts each year.
Of course, that’s still an estimate - but your answers to these seven questions will help you create the retirement lifestyle you desire. Later, you can spend more time comparing your current expenditures and your post-working life projections and create a detailed budget, for your:
- early, mid and later retirement phases...
... and end up with a more accurate projection of your investment income needs. So,
How Much Do You Need in Your Investment Accounts to Fund Your Retirement Lifestyle??
The Key to a Fabulous Retirement:
Know your “NUMBER”
I teach people to find both their minimum number and a high-end number. Once you reach your minimum, you can consider taking some chances - what if you quit your high-paying, high-stress job early and go work for that non-profit at a drastically reduced salary?
Or maybe... start taking all your vacation days and check a few bucket-list items off before you’re too old to enjoy an elephant ride through the jungle or a hot air balloon ride?
And, you've still got your big, high-end NUMBER the one that would keep your accounts growing throughout retirement and fund all your dreams: round-the-world trips, grandkids' colleges, charitable endowments - whatever you've got on your list!
>> A Quick, Easy Way to Find Your Number:
(click on the image below to create one for yourself).
In this example, for every $11,250 in annual income you want from your investment accounts, you’ll need to start with a quarter million dollars to be 73% sure it will last 30 years.
Let's see how this works for a typical MoneyDiva:
Ruth – a divorced, single, professional & mom of two college students
Ruth has a fairly high expense lifestyle to go along with her executive level salary of $120,000. She pays her mortgage, two car payments (one for her, one for the kids to share when they’re home) and some college fees.
She plans to pay off her mortgage before retirement, own a paid-off car and have no other debts. She's counting on her kids supporting themselves and her elderly parents passing on before she quits working.
She's entitled to half her ex-husband's pension and got half the 401k after her divorce 8 years ago - but she hasn’t added any more money to her retirement accounts since then. So her beginning 401k balance is $100,000.
Ruth likes her job - it’s physically easy with a minimum of travel, so she’s planning to work until she’s 70 (or they put her out to pasture, as she says). Then, hopefully, a quiet retirement with visits from the grandkids and a modest retirement lifestyle – remaining in her home (renting out a room is an option), flower gardening, quilting and a little travel visiting relatives and friends.
That means her expenses in retirement should be lower - let’s say 70% of her $120,000 income: $84,000.
If she works until age 70, she’ll receive a higher Social Security payment - about $40,000.
(from the easy to use estimator
She’s also entitled to ½ her husband’s pension which starts when he turns 60 - about $10,000 a year (that's an extra $100,000 she'll receive before she retires that can add into her savings/investment accounts).
To get to the $84,000 she needs in post-work income, she'll need to withdraw $34,000 a year from her retirement accounts for at least 25 years.
Using a conservative 4% withdrawal and 25/50/25 allocation, her minimum NUMBER
Starting with $100,000 in her 401k, and with 20 years to save and invest, she should be able to use the power of compounding to easily meet or exceed that goal!
The calculator at http://www.investor.gov/tools/calculators/compound-interest-calculator says she needs to save only 12% of her gross salary: $1200 per
Get a Big Jump Start on Your Desired Retirement Lifestyle...
By Knowing the Answers these Questions:
How much income will you need from your retirement account(s)?
Your minimum NUMBER (plus, your high-end NUMBER) OR:
How much will you need in your investment accounts to fund a fabulous retirement?
I’d love to hear about how this special report helps you find and achieve your retirement income goals. Talking about income and financial information can be a taboo subject so, if you’d prefer to email me privately, with your calculations or any questions send me an email
While I can’t offer specific financial advice, I am happy to clarify any points, direct you to more resources and cheer you on!
Live Long and Prosper, Leah the MoneyDiva.com