Below is a simple example illustrating how to fill the gap between dollars needed and dollars available as you begin your retirement. In this hypothetical, a couple projected they would need $4,000 a month in retirement. How close are they, and how will their needs be filled with their assets? They currently have income above the $4,000 needed in retirement. As you look across the graph you will see that they are $300 short of meeting their needs when the second person is ready to retire. That is $3,600 short on an annualized basis. How do you fix it? Our rule is to us no more than 5% of your lump sum amount in order to be quite certain that you will never run out of money. (How much is enough is a contentious issue among planers and will be discussed further under special topics) To figure out how to cover the $300 short fall, we could cut our standard of living in retirement or save more, but how much? $3,600 (our annual short fall) divided by 5% (our rate of use) equals $72,000. This is how much more is needed in their retirement account when the second person retires. If they can’t save this much then they should elect to wait awhile longer to retire or to reduce their spending in retirement.
A higher draw from their investments (7-9%) could cover the need, but using that much increases the probability of “running out of money”, (a very real concern among our older citizens). Inheritance is sometimes a possibility but there are so many variables that it is difficult to build into planning. A study of our asset protection section may help you understand issues present in this planning area.
$4,000 will be needed in retirement for both people. He wants to retire in 5 years; she can retire in 10 years.
| |
5 Years Out |
|
|
10 Years Out |
|
| |
His SS
His Pension
His IRA
Her wages
Her SS
Her Pension
Total |
$900
$700
$300
$2,100
-0-
-0-
$4,000 |
|
$900
$700
$300
-0-
$900
$900
$3,700 |
$300 Short |
|
Want to try your own?
Investments will be needed to fill the gap of $300 in our example. You can design your own chart if you like for your own projections.
Like to know some statistical averages? In seminars I would ask the average couple to stand up – no one ever did. So what is average and how might you fit? The first general rule is that a couple will need approximately 75% of their current needs in retirement as compared to their working years. We see this guide to be accurate for future needs at about $40,000 annual income. If you are close to this now, your income taxes and Social Security withholding as well as Medicare will allow the 75% rule to be close. If you are much below this level, you may need to have as much income in retirement as when working as there is little or no tax difference for you and everything you make is going to subsistence. If you are in the higher income brackets you will need a greater percent of your current income because your income tax rates may not change. Think around 85% of current income less any investment costs that will be discontinued in retirement.
Summary
The information gathering section should be complete and accurate with additional notes if needed. The projections are only going to be your best guess and subject to revision. The general plan format we are offering will need to be personalized by you to fit your needs and goals. For instance; you may want to sell your house for ‘big bucks’, which by the way is a very tax friendly transaction, and move into a condo or to Mexico and live for almost nothing. Seriously, my folks sold their large home and bought a mobile home in a nice park. The place was closely watched by neighbors and maintained by the park people, virtually no worries and no house payments. They chose travel and literally saw the world. We didn’t know where they were for weeks on end.
Keep faith, the fact is that this ‘financial stuff’ was probably never offered to you in any formal educational setting and if it were, you as a kid, would probably not have taken it seriously anyway. NOW is your chance to start catching up.
Since financial investing and management was not taught in school, you must now learn to play this game on your own. It is not possible to sit out a hand or move to another table, for this is the only game in town and you must play. Why not learn to play and play to win? You will always have the job in retirement of managing your retirement. Speaking of average, here are two government tables as to income and how money is spent, both in retirement.
| |
|
|
Sources of Retirement Income
|
|
Annual Expenses for Average Couple
|
|
|
|
| |
|
1. Social Security - 21% |
|
|
|
1. Housing - 33% |
| |
|
2. Pensions - 19% |
|
|
|
2. Other - 5% |
| |
|
3. Earned Income - 24% |
|
|
|
3. Gifts/ Contributions - 6% |
| |
|
4. Investments - 34% |
|
|
|
4. Clothing / personal care - 7% |
| |
|
5. Other Benefits - 2% |
|
|
|
5. Transportation - 10% |
| |
|
|
|
|
|
6. Medical Care - 10% |
| |
|
|
|
|
|
7. Food - 29% |
Personal Planning
Go To Page
1
