In this article, I am providing a sort of "starter kit" for those of you who are getting closer to retirement - and want to consider the basic variables for a mostly stress-free transition when you do retire.
Here are eight initial first steps to get you thinking about a "low drama" retirement:
1. Figure out how much you need to spend.
Many financial advisers use a rule of thumb for needed retirement income of 60 to 66 percent of current pretax income. However, this estimate is just a rule of thumb for an average case.
To estimate your retirement expenses yourself, begin with a baseline, and then make adjustments.
For your beginning baseline, start with your current monthly income. This will give you an idea of how much you currently spend each month. Then deduct expenses that you currently have that will disappear after retirement.
- For example, suppose your current monthly income is $5,000 after taxes. Assume that your monthly expenses equal your monthly income, so begin with this number.
- Deduct your savings. After retirement, you won’t be saving any more. Suppose you save $500 each month. Deduct that from your total ($5,000 − $500 = $4,500).
- Deduct how much you’ll save in living expenses if your home is paid off by the time you retire. For example, if you're paying $1,000 per month towards your home and it is paid off, you no longer have to pay that amount in retirement ($4,500 − $1,000 = $3,500).
2. Calculate what annual income you need after retirement.
Determine how much income you will receive from your current retirement savings, including Social Security, your pension and any retirement accounts you already have. Compare that monthly income with your estimated monthly expenses. Multiply that number by 12 to get your yearly income gap.
- Using the above example, you estimated that you will spend $4,000 each month in retirement.
- Suppose you know you will receive $2,100 from Social Security and $3,250 per month from your pension. Your monthly income will be $5,350.
- Your income gap is $5,350 − $4000 = $1,350 x 12 = $15,600
3. Calculate how much you will need to save or invest before retirement
Assume you will want to withdraw 4 percent from your retirement savings per year. Multiply your annual income gap by 25 to estimate 25 years of living past retirement. This will tell you how much more you need to save between now and retirement in order to have enough.
- In the above example, you annual income gap is $15,600.
- Multiply this by 25 ($15,600 x 25 years = $390,000.
- You need to save an additional $390,000 using retirement accounts such as a 403(b), 401(k) or IRAs.
- These numbers are rough estimates and presume no substantial draw downs of principal after retirement.
- You may have to adjust your calculations to include more years of retirement if your spouse is much younger than you are.
- How you save or invest that money is a discussion you should have with me (Rocky) at your request.
4. Consider changes in your retirement lifestyle.
If you are going to travel regularly, then some expenses might increase. However, you might also decide you need to spend less on commuting, clothing and groceries.
Suppose you can reduce your monthly transportation, grocery and clothing budget by $300 per month. But, you plan to take one large trip each year for $5,000, so you plan to save $450 per month for this trip. The net change means adding $150 per month to your budget ($3,500 + $150 = $3,650)
5. Decide when to apply for Social Security benefits.
The age at which you begin to collect Social Security benefits affects the percentage of benefits you will actually receive. Choosing the optimum age at which you should apply for benefits depends on many factors. Consider your life expectancy and financial picture to decide how long to wait.
- Waiting until full retirement age allows you to collect 100 percent of your Social Security benefits. If you were born before 1938, full retirement age is 65 years old. For those born in 1938 and after, full retirement age can be up to 67 years of age.
- To determine your full retirement age, refer to the Social Security Administration’s retirement chart at https://www.ssa.gov/planners/retire/agereduction.html.
- If you can wait until age 70 to collect Social Security, you can collect an even higher monthly check (persons born after 1943 earn an increased benefit of 8 percent per year of deferral).
- You can begin collecting Social Security as young as age 62. However, you will receive a permanently reduced amount. If your full retirement age is 67 and you begin collecting at age 62, your benefit amount will be reduced by 30 percent.
- If you have other financial resources, it makes sense to delay collecting Social Security benefits until you are of full retirement age.
- If you will have high expenses in your retirement, such as if you devote much of your retirement income to an entrepreneurial goal or if you are in poor health, it may make more sense to begin collecting Social Security benefits at a younger age. This make sure that you have a steady enough income through this time to support your living expenses.
7. If you plan to move after retirement, choose the right time.
Downsizing is a part of many people’s retirement plan. However, leaving the family home may also require leaving behind a community and connections that are important to you. Picking the right time to leave your family home is a personal decision. For some, the change happens when both partners in a marriage are still alive and want to spend time together in a different place. For others, the death of a spouse prompts the decision to move. When you decide that the time has come to look for new housing in retirement, consider not only your budget, but also your lifestyle, the proximity to your family and the status of your health.
8. Consider what your health will be like after retirement.
If you are in good health, you can choose to live independently. However, you must accept that changes in your health are an unavoidable part of aging. Your health status can change gradually, or you may experience a sudden decline in health. If you have enough money, you can stay in your home and arrange for professional caretakers to help you. If not, you may have to arrange to either live with a family member or move to a facility where you will be cared for.
Note: When you are ready to discuss your retirement plans or want clarification regarding any of these retirement planning points, please contact me as desired.