Estimating your retirement income needs of Abney Associates Ameriprise Financial Advisor
You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you'll need to fund your retirement. That's not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.
USE YOUR CURRENT INCOME AS A STARTING POINT
It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity, and the fact that there's a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you'll no longer be liable for (e.g., payroll taxes) will, theoretically, allow you to sustain your current lifestyle.
The problem with this approach is that it doesn't account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100 percent (or more) of your current income to get by. It's fine to use a percentage of your current income as a benchmark, but it's worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.
PROJECT YOUR RETIREMENT EXPENSES
Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That's why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you'll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:
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Food and
clothing
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Housing:
Rent or mortgage payments, property taxes, homeowners insurance, property
upkeep and repairs
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Utilities:
Gas, electric, water, telephone, cable TV
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Transportation:
Car payments, auto insurance, gas, maintenance and repairs, public
transportation
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Insurance:
Medical, dental, life, disability, long-term care
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Health-care
costs not covered by insurance: Deductibles, co-payments, prescription drugs
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Taxes:
Federal and state income tax, capital gains tax
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Debts:
Personal loans, business loans, credit card payments
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Education:
Children's or grandchildren's college expenses
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Gifts:
Charitable and personal
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Savings
and investments: Contributions to IRAs, annuities, and other investment
accounts
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Recreation:
Travel, dining out, hobbies, leisure activities
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Care for
yourself, your parents, or others: Costs for a nursing home, home health aide,
or other type of assisted living
-
Miscellaneous:
Personal grooming, pets, club memberships
Don't forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2.4 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, 2012.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children's education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it's always best to be conservative). Finally, have a financial professional help you with your estimates to make sure they're as accurate and realistic as possible.
DECIDE WHEN YOU'LL RETIRE
To determine your total retirement needs, you
can't just estimate how much annual income you need. You also have to estimate
how long you'll be retired. Why? The longer your retirement, the more years of
income you'll need to fund it. The length of your retirement will depend partly
on when you plan to retire. This important decision typically revolves around
your personal goals and financial situation. For example, you may see yourself
retiring at 50 to get the most out of your retirement. Maybe a booming stock
market or a generous early retirement package will make that possible. Although
it's great to have the flexibility to choose when you'll retire, it's important
to remember that retiring at 50 will end up costing you a lot more than
retiring at 65.
ESTIMATE YOUR LIFE EXPECTANCY
The age at which you retire isn't the only
factor that determines how long you'll be retired. The other important factor
is your lifespan. We all hope to live to an old age, but a longer life means
that you'll have even more years of retirement to fund. You may even run the
risk of outliving your savings and other income sources. To guard against that
risk, you'll need to estimate your life expectancy. You can use government
statistics, life insurance tables, or a life expectancy calculator to get a
reasonable estimate of how long you'll live. Experts base these estimates on
your age, gender, race, health, lifestyle, occupation, and family history. But
remember, these are just estimates. There's no way to predict how long you'll
actually live, but with life expectancies on the rise, it's probably best to
assume you'll live longer than you expect.
IDENTIFY YOUR SOURCES OF RETIREMENT INCOME
Once you have an idea of your retirement income
needs, your next step is to assess how prepared you are to meet those needs. In
other words, what sources of retirement income will be available to you? Your
employer may offer a traditional pension that will pay you monthly benefits. In
addition, you can likely count on Social Security to provide a portion of your
retirement income. To get an estimate of your Social Security benefits, visit
the Social Security Administration website (www.ssa.gov) and order a copy of
your statement. Additional sources of retirement income may include a 401(k) or
other retirement plan, IRAs, annuities, and other investments. The amount of
income you receive from those sources will depend on the amount you invest, the
rate of investment return, and other factors. Finally, if you plan to work
during retirement, your job earnings will be another source of income.
MAKE UP ANY INCOME SHORTFALL
If you're lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you'll come up short? Don't panic--there are probably steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:
- Try to cut
current expenses so you'll have more money to save for retirement
- Shift your
assets to investments that have the potential to substantially outpace
inflation (but keep in mind that investments that offer higher potential
returns may involve greater risk of loss)
- Lower your
expectations for retirement so you won't need as much money (no beach house on
the Riviera, for example)
- Work
part-time during retirement for extra income
-
Consider delaying your retirement for a few
years (or longer)
Estimating your retirement income needs of Abney Associates Ameriprise Financial Advisor
By scarlerburn
Estimating your retirement income needs of Abney Associates Ameriprise Financial Advisor
You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you'll need to fund your retirement. That's not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.
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