Michele Clark
Clark Hourly Financial Planning - Chesterfield, MO Advisor
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Chesterfield, MO 63017 USA
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Retirement Income: Estimating How Much You Will Need

September 2nd, 2016

Use your current income as a starting point

You have probably read financial press articles that discuss desired annual retirement income as a percentage of your current income. Depending on the article, 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., costs associated with working such as lunches out, dry cleaning, commuting, etc.) 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 you 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
  • Housing: Rent or mortgage payments, property taxes, homeowners insurance, HOA fees, property upkeep and repairs
  • Utilities: Gas, electric, water, telephone, cell phone, Internet, cable TV, trash
  • Transportation: Car purchases or payments, auto insurance, gas, maintenance and repairs, public transportation
  • Insurance: Medical, Medicare Supplement, dental, life, long-term care
  • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
  • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
  • Taxes: Federal and state income tax, capital gains tax, personal property tax
  • Travel: for fun, to visit family, to go to family events such as weddings and funerals
  • Clothing
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal such as Christmas, birthday, wedding
  • Recreation: dining out, hobbies, leisure activities, season tickets to sports or entertainment
  • Miscellaneous: Personal grooming, pets, club memberships, household items

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 2.3 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, January 2015.) 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, will increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Keep in mind that some expenses have historically gone up at a rate greater than inflation.  For example, in our retirement projections we inflate healthcare expenses at a rate of 6%.

Decide when you will 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). 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. We can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses now so you’ll have more money to save for retirement
  • Consider delaying your retirement for a few years (or longer)
  • 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

The best way to determine if you are on track for the retirement you envision, is to get started now on a financial plan. You don’t have to go it alone; you can enlist the help of a professional.  Contact us today.

Based on an article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

 

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Michele Clark in the News: Learnvest article about Understanding Retirement Planning Benefits of Different IRAs

September 2nd, 2016

I was honored to be quoted recently in the article “Traditional vs. Roth IRAs: Understanding the Retirement Planning Benefits of Each” on Learnvest. It is a good introduction to the differences between the two types of IRA accounts and when you might choose between them.

Some of the differences and rules covered are:

  • Contribution Limits
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  • Income Restrictions
  • Withdrawals

 

I find when planning with families that the decision is a multi-step process. We need to take into consideration all of the vehicles available to them including work and/or self-employment, their potential matching from employers, if they have a spouse and if the spouse is considered an active participant in an employer plan, the quality of their plans, their income phaseout thresholds, and their entire picture of financial goals ranging from short term to long term to determine how much they can afford to put toward all of their goals.  That then informs us what the best vehicle is, or in most cases, vehicles are.

 

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Michele Clark Quoted in the News: St Louis Post Dispatch article about financial compatibility

February 26th, 2015

The St Louis Post Dispatch quoted me in their article “Is Your Honey Good With Money? Better Find Out Before Tying The Knot.” in the Sunday paper.

I shared my thoughts on couples and financial compatibility.  As a financial advisor for twenty some years, I have worked with many different couples of various age ranges, so I was able to share some ideas for checking to see if you think about money in the same way.

Even if you don’t, one of the most important things to do is to talk about it before you marry.  Money squabbles are one of the leading causes of divorce.  Valentine’s Day has just passed and love is in the air, take a look at this article to make sure it stays that way!

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Michele Clark in the News: Wealth Gathering’s Moneymentals Blog

January 7th, 2013

Should you get your investment advice from a couple of plumbers?  I did and it turned into a wonderful career for me.   Those plumbers were my grandpa and my dad.

Learn how I got introduced to investing at a very young age and how it has influenced my thinking about investing ever since by reading “Blogger Interview: Hourly Planner’s Michele Clark” at the Wealth Gathering website.

Michael Goldman at Wealth Gathering asked me some questions about;

  • My professional background and why I didn’t stay in the traditional, commissioned-based brokerage firm environment.  I have worked in a bank, bank brokerage firm, a full commission brokerage firm, and a full service discount brokerage firm.
  • How does my family balance living in the moment vs. saving for the future.  Such a great question, because it is the essence of financial planning.
  • Who is your financial role model.  I could have gone on and on with this one.  I think I will do a future blog post of my own.
  • And do I think everyone is capable of learning enough about personal finance to do it on their own.  This answer may surprise you!

I know Michael through the Garrett Planning Network.  He is like me, in that he owns his own financial planning firm.  In addition he has the Wealth Gathering site which is so unique.  It is designed to offer online tools, coaching, and peer support.  It is structured like a financial fitness program.   As you know, I am a fee-only financial advisor, so I do not receive any compensation from them, and am not affiliated with Wealth Gathering.  If you have a chance to look at the interview, take a look around at the other information on the website.  Especially considering this is the time of year that so many people are tackling financial To Do items.

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Michele Clark in the News: US News and World Report “Your Retirement Benefits”

December 12th, 2012

US News and World Report quoted me in their article “Your Retirement Benefits: What to Expect in 2013” on their website this week.

I shared my thoughts on 401(k) fee disclosures.  401(k) providers are required to disclose the fees for the plan.  All things being equal, if two funds are simlar but one has lower fees than the other, choosing the fund with lower fees will allow the investor to keep more of their money invested for their future.

The article is full of information on a variety of topics.  It covers information about changes to contribution limits, the Roth IRA income limit increase, the saver’s credit, the pension insurance limit for 2013, the increase in Social Security taxes (expiration of the tax cut), and Medicare premiums and coverage.

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