How Much Do You Need for Retirement
Dana here.
Do you remember back in school, especially in history class, all of the timelines you had to study? No matter what grade you were in or what specific point in history you were learning about, they were useful for various reasons.
Timelines show the sequence of events from the first to the last along a line. They help you visualize the connections between events and allow you to draw conclusions based on those events.
The same is true when it comes to retirement planning. Creating a retirement planning timeline allows you to visualize at what age you can retire, how much money you will need for retirement, and what you need to do to reach your retirement goals.
Knowing how much to save is one of the most challenging aspects of retirement planning, and there is no one size fits all solution. Some people can't wait to retire, while others enjoy working and spending at their current income level.
In the past, I have talked about rules of thumb such as the 4% Rule or the 80% Replacement Rule. As you are saving for retirement, rules of thumb get you moving in the right direction, but they do not outline the specifics.
A better way to estimate how much you will need to save for retirement is to create a series of timelines. Start with your future estimated income.
The Income Timeline
The income timeline is a projection of fixed sources of cash, such as Social Security, pension payments, and annuity payouts. This timeline allows you to see what sources of cash flow will be readily available to you.
If you are married, you and your spouse might not retire at the same time, so your fixed sources of cashflow will begin at different times. Or one of you may have a pension. Or your pension may start at 65, but your Social Security at age 67.
Take your timeline and project it out for your estimated lifespan. This helps you see how your fixed income will change as different sources of income begin at different times.
Then, estimate expenses.
The Expense Timeline
To make an expense timeline, you need to know about how much you’ll spend. Look at your current take-home pay. After all deductions, what gets directly deposited to you? Your total amount is the number your current lifestyle is based on now.
While take-home pay does give you an estimate of what you will need to maintain your current lifestyle, it doesn't take into consideration your changes in spending, such as paying off a mortgage, health care costs, and unexpected repairs.
As you plan for retirement, an expense timeline will help you visualize how your spending will change from one year to the next. For example, if you have mortgage, it's a fixed cost. It won't go up with inflation, but property taxes and homeowner’s insurance will.
And don't forget to add in periodic expenses like car purchases and home repairs. You will want to add front-loaded expenses to your retirement timeline as well. For example, if you want to travel, you will want to do that early on and might account for higher travel expenses in your first five years of retirement.
If you retire before 65, you will not be eligible for Medicare yet, so you will have to account for higher health care premiums too. Usually those go down once you become Medicare eligible.
How Long Will Your Projected Income Last?
After you have created your income timeline and expense timeline, compare the two, and calculate the gap. The gap shows you how much you need to withdraw from savings and investments each year to cover any expenses that are not covered by fixed income.
Next, you compare your total estimated withdrawals over your lifetime to the total amount of financial assets that you have. You do this using a present value calculation. Present value shows how much you need to have saved today to deliver a future stream of cash flows.
By looking at the present value of your lifetime withdrawals, you can see how much you are going to need to withdraw from savings to cover the difference. Perhaps you find you have more than you need, and you can retire earlier or spend a little more.
But what if you find that you don't have enough? Look at ways to reduce spending and how you can save more between now and retirement. Or find ways to earn additional or part-time income.
Going beyond rules of thumb and using retirement timelines is the most accurate way of estimating how much you need for retirement and allows you to make smart, educated choices.
We use this process to create personal financial models for our clients. To learn more, you are welcome to complete our Pre-Meeting Questions and we will reach out to schedule a complimentary introductory meeting where we explain our methodology and pricing. You can find the questions at the link below.
Pre-Meeting Questions
Next Free Webinar, Thursday, July 23, 2020, How to Make a Retirement Income Plan
How much will you need to retire, and where will it come from?
In this class, we will show you how make a detailed retirement income plan by creating a series of timelines that chart out your future income and expense. You will see how you can put together a crystal-clear picture of your future retirement income.
We will go over:
- How to make a retirement budget and the most commonly overlooked expenses
- What a future income timeline looks like
- How to calculate how much you will need to withdraw each year during retirement
- Mistakes people make with their assumptions about inflation and rates of return
- How to see if your retirement money will last
We will leave plenty of time for question and answers at the end.
When: Thursday, July, 2020 5pm AZ/ 7pm CST/ 8pm EST
You can register at How to Make a Retirement Income Plan
Podcasts & Video
Exceptional Advisor Podcast:
Dana Anspach, CFP®, RMA®, founder of Sensible Money, LLC, had a fantastic interview with Robert Powell, editor of Retirement Daily at The Street about retirement in the Covid-Era.
Retirement Insights in the Covid-Era
Money Magazine Video:
Dana also talked to Money Magazine about how the corona virus pandemic may affect your retirement plans in this YouTube video:
Retiring During COVID-19? Is It Even Possible?
May 2020 Webinar: Planning for Disruptions
You can watch last month's free webinar, along with our other past webinars on YouTube.
Planning for Disruptions
Sensible Money in the News
Sensible Money's Amy Shepard,CFP®, BFA™, was quoted in this article from Forbes, "Getting Married? Make An Insurance Plan"
Dana Anspach contributed to this article from U.S. News & World Report "How to Correct Your Social Security Earnings Record"
Dana also contributed to this article from 401K Specialist, "Good Reasons Not to Raid that 401k"
Financial Sense is an almost-monthly publication of Sensible Money. It's about financial planning and smart money decisions, not sensation and hype. You know.... sensible.
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