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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
Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage, anywhere from 70 percent to 90 percent, to reflect the fact that there will be certain expenses you’ll no longer incur, will, theoretically, allow you to sustain your current lifestyle. The appeal of this approach lies in its simplicity, and the fact that there’s a fairly common-sense analysis underlying it.
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:
- Food and clothing
- Housing: including property taxes, insurance, upkeep and repairs
- Utilities
- Transportation: Car payments, auto insurance, gas, maintenance and repairs
- Insurance: Medical, dental, life, disability, long-term care
- Health-care costs not covered by insurance
- Federal and state income tax
- Debt payments
- Gifts: Charitable and personal
- Recreation: Travel, dining out, hobbies, leisure activities
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 2.2 percent, but it has been much higher recently. And keep in mind that your retirement expenses may change from year to year — expenses such as health care and insurance may increase as you age. To protect against these variables, build a comfortable cushion into your estimates. 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
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. 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
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. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. We plan to age 93 for most clients. 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
What sources of retirement income will be available to you? Maybe you are fortunate to have an employer pension? Social Security can also provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (ssa.gov). Additional sources of 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 can 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 — here are a few steps you can take to help bridge the gap:
- 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
- Work part-time during retirement for extra income
- Consider delaying your retirement for a few years (or longer)
Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
Zivney Financial Group is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. The information has been obtained from sources considered to be reliable, but we do not guarantee that the forgoing material is accurate or complete. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information was developed by Broadridge, and independent third party, for financial advisor use. Raymond James is not affiliated with and does not endorse, authorize or sponsor Broadridge.
