Part 2: Deciding On Your Retirement Goals
April 29, 2008 – 5:16 pmIn my last post I covered bad ways to figure out how much money or sources of cash flow you need in order to retire.
Today we’ll cover the initial decisions necessary to start your retirement planning. Here’s the key goal for today: estimate how much income you will need in retirement in today’s dollars (i.e. don’t adjust for inflation yet).
Easy Way: Estimate your retirement income needs based on a percentage of your current income.
A common recommendation is to use 70-80% of your current pre-tax income (gross income), although some financial “experts” and professional planners give recommendations that range from 70-110%. The truth is you need to think through this decision based on your own lifestyle and expectations.
If you’re frugal, like some of my fellow bloggers for example, perhaps you live off 50% of your income now. If that’s the case there’s no reason to think that you won’t be able to continue doing so, unless of course you’re not happy with your current lifestyle.
For others of you, perhaps you have a huge house now and plan to downsize. If that’s the case you should search around on the internet and get a rough idea of how much you’ll save in yearly expenses (after insurance, property taxes, etc) based on your new location and/or house size.
In my own case, I look at the level of lifestyle I currently enjoy and then try to adjust it in rough terms based on my wants, needs, and desires. For example my wife and I have a home we like that would be big enough but not too big for us in our retirement years. We have a stable spending pattern, and although we don’t have kids yet we expect to be kid-free in retirement as well. This makes our calculation easier to perform and understand. We simply say: “Are we happy with our lifestyle now”, and if so we just need to remove the savings portion from our income to get our necessary retirement income.
We’re just looking for a working assumption here. Don’t spend 3 years trying to come up with the perfect calcuation that takes everything into account. You can always change your mind and revise your plans later.
Harder Way: Put together a retirement budget
If you take this approach it’s best to start with your existing family budget and then adjust a copy of it based on the following:
- Which expenses will go down when you retire? Gasoline, clothing, and dining out (lunches)?
- Which expenses will go up? Medical expenses, insurance premiums, travel, hobby costs?
- Do you want your level of giving to go up or down?
- Will your on-going housing costs change? Will you relocate or stay where you are?
- Will your debt payments be complete by the time you retire?
Watchout: make sure you keep track of your number in terms of gross income (pre-tax). Most of the online calculators use gross income (pre-tax) as an input, and then some go one step further and ask you about your pre and post-retirement income tax rates.
Do you have your gross income number now? For the purposes of this post series I’m going to assume $50,000 in pre-tax income ($50M).
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