When you plan for retirement – which is hopefully long before you’re thinking about actually retiring – the biggest question you might have is “When can I retire?” But even the best financial planner can’t answer that until you answer another question regarding your retirement income goal.
“How much income will I need?”
It’s not an impossible question, but it’s the single-most important one to answer before you make a retirement decision. All of your post-career financial planning should be based off of hitting your target annual income. And that financial goal is also not a “set it and forget it” figure. You should revisit and revise your target income as often as once a year.
Mistakes in Setting a Retirement Income Goal
Many people will tell you the key to planning retirement income is to simply estimate a percentage of your current income. What’s appealing about this approach is its simplicity, and on the surface, it makes sense. If you’re living comfortably now on your current income, you could live just as comfortably, post-retirement, on less. You’ll not only stop paying payroll taxes, but you’ll likely spend less on transportation, with less wear and tear on your car. You may save money on eating out since you’ll have more time to make meals at home, and so on.
But determining what percent of current income you need to maintain is not easy. Estimates can vary greatly, from 60% to 90% or more. A flat calculation also neglects your specific post-retirement goals. Many people intend to travel more after retiring, for instance. If that’s you, you might easily need 100% of your current income, or even more, to do so. So, while it’s fine to use a percentage of your current income as a baseline, you should explore all of your current expenses in detail and consider how they might change as you move into retirement.
And then there are outside influences.
The “I” Word
A big factor to account for as you address your retirement income goal is inflation, which has averaged a little more than 3% since 1914 (but can swing wildly in a given year due to unforeseen variables, like war or a pandemic like COVID-19). If that average holds, this means that if $50,000 satisfies your retirement income needs in the first year of retirement, you’ll need $51,500 next year to meet the same needs. A decade down the road you’ll need about $67,196.
Those are estimates that can change, but the fact remains. With inflation, you’ll likely need more income each year to maintain the same standard of living.
Regular expenses will appear, disappear, or change in the future, either due to retirement or simply due to their nature. Cars and mortgages might be paid off, health care will eventually shift to Medicare, dependents will become independent, etc. Here are some specifics to keep in mind as you run your numbers.
- Smaller home expenses – or a smaller home: Is your house paid off, or will it be soon? Can you downsize to realize some of that home equity? Should you?
- Diminishing work costs: In addition to an end to payroll taxes, gas consumption or MARTA fares might diminish when you’re not commuting to an office. You can probably count on trimming your clothing and dry cleaning budget, too. And you’ll stop contributing to retirement savings. All of these savings can bolster your budget.
- Health care conundrums: Healthcare costs can be a challenge if you retire before you’re eligible for Medicare. And rates can vary greatly year to year, making budgeting properly for them problematic. Long-term care is something you may not enjoy thinking about, but an extended nursing home stay can be financially catastrophic and often unforeseen. Consider setting aside money for the worst-case scenario, or insuring against the possibility.
- Having more fun: Many people find that with more free time, they spend more on entertainment and dining out. If that sounds like you, make sure to budget accordingly.
- Loved ones: Are you financially responsible for children or for parents? When could that change in the future, and how might it impact your spending? Do you plan on regularly giving gifts to family or to a favorite charity? Consider, too, any funds that you want to leave to your loved ones when you’re gone.
Of course, many people begin establishing their retirement income goal by looking at what their Social Security check will be. That’s a number that varies greatly, not just based on how much you’ve earned over your lifetime but also on your age when you retire.
For a detailed explanation of how your retirement age affects your Social Security check, you can review our last article which dives into the topic more specifically. The Social Security Administation has a good primer, too. At the highest level, you should know that you can start drawing Social Security payments as early as 62. But “full retirement age” is considered 66 or 67, depending on your date of birth, and taking payments before then means a smaller monthly check.
Your Best Plan
Any time there are so many moving parts and so many unknown variables, often your best plan is to bring in some expert help with your financial planning. If you call us or reach out online, one of our financial advisors will set up a consultation and begin helping you set realistic income needs for your planned retirement lifestyle – and we can analyze your retirement savings and your savings plan to help ensure that when you do retire, you can do so comfortably.
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