How To Realistically Plan For Retirement?
Just the other day, I overheard a very involved conversation between a husband and wife, where they were both afraid that they would never be able to afford to retire. The wife was talking about this man who just passed away, at 89, and she said that she marveled at how someone could live that long, and still be able to maintain the apparently nice life style that this gentleman seemed to live. The longer the conversation continued, the more downbeat and depressed this couple appeared, appearing almost to give up on their own future. What can people do to plan to be able to retire and maintain a reasonably reasonable life style?
1. Determine how much it costs you to live today, calculating in housing costs (including utilities, etc.), food, health coverage, reasonable amount of entertainment, a vacation or two per year, etc. For each couple, what is included may vary, because for each, the needs and desires may vary.
2. Now use an actuarial table to determine what a fairly average amount of annual inflation will translate that number to, and instead of basing the need on the dollar amount at age 65, calculate the number of years until you turn 75 instead. As a rule of thumb, remember that at three percent (3%) inflation per year, the amount needed will double in approximately 24 years (the "Rule of 72," division 72 by 3). Therefore, if you feel you need $ 50,000 per year in today's currency, it would be equivalent to $ 100,000 in 24 years.
3. Once you determine how much you'll need to live on, now it is time to start figuring out how to get there. Start with your payment from Social Security. Every year, shortly before your birthday, the Social Security Administration sends you an estimate of what your monthly payment would be based on your contributions to date. If you use that number as your estimate, and multiply it by twelve months, it will give you a conservative way to begin. So, let's assume that the number that you are working with from Social Security is $ 1,500 per month. Twelve times that is $ 18,000 per year. Therefore, begin by subtracting this $ 18,000 figure from the inflation adjusted $ 100,000, and you begin planning your additional additional $ 82,000 per year (or slightly under $ 7,000 per month). So, how can you save enough money to give you that $ 82,000 annual income?
4. Do you have a pension? Is it already vested? What is the conservative estimate of what it might be paying you per year? Let's use an estimate of another $ 1,500 per month or $ 18,000 for the sake of this example. Subtract that $ 18,000 and you arrive at an additional need of $ 64,000.
5. Do you own any property? What is a conservative estimate of its net worth, and calculate only the net worth? Therefore if your home's lowest market value is $ 700,000 and you now have a $ 300,000 mortgage, the net today is $ 400,000. When will your mortgage be fully paid up? Would you want to remain in this house, or would you want to downsize or move to an area where housing costs are far less expensive. One of the reasons that many retired people move from the Northeast to the Southeast (Florida, South Carolina, etc.) is that the cost of living in those areas is far less? Is that something you would want to do after retirement? If it is, calculate the difference between your net home value and the lower priced home that you would purchase.
For example, assume that your mortgage remaining at retirement is then $ 100,000 instead of $ 400,000, and that housing goes up by the same cost of living figure used above (2-3%). Therefore a $ 700,000 home may be worth $ 900,000 in fifteen years, while the mortgage is reduced from $ 400,000 to $ 100,000 during that period. Your net value of your home would then be approximately $ 800,000. Let's assume you decide that you will move to Florida where housing costs dramatically less and buy a house or condominium that is then priced at $ 400,000 (for this example, using a greater increase in value for the house purchased than the house sold, for it is better to err on the side of being conservative, and ending up with more revenue than anticipated. That difference of $ 400,000, invested at approximately four percent (4%) would add $ 16,000 per year more to your income stream. further need to $ 46,000.
6. How old are you? What age will you be retiring? Determine the number of years. Have you been saving up to this point? If so, how much do you have put away in reserve? Let's assume that you've put away only $ 100,000 to date. That invested at 4% would fetch $ 4,000 more and your annual need has now been reduced to only an additional $ 42,000. What is the value of your investment portfolio? How is it invested? Depending on your age, consider changing the investment vehicles to more conservative investments which emphasize maintaining principle and conservative growth. For most people, that would create an additional safety net.
7. Let's assume you are fifty and want to retire at 67, when your Social Security is scheduled to kick in. That leaves you seventeen years. Would you be willing to plan to secure your Golden Years, by paying yourself first, when you pay the rest of your bills? Each week, make believe you are making ten percent less, so based on the $ 50,000 per year, that means think $ 45,000 instead of $ 50,000. Therefore, commit that ten percent to a payment to a safe, conservative investment vehicle, and place $ 100 per week ($ 5,000 per year) away in an account that you will not touch. In those seventeen years between age 50 and age 67, this strategy will accumulate substantively, and when needed will generate that additional income.
Obviously the earlier you begin your planning the easier it will be. I have based these assumptions using conservative growth, and slow appreciation, with average inflation over that time. Those that want to feel secure in their retirement years must plan ahead, and make the necessary commitments to get it done. Do not wait until you are about to retire, and then look back and complain. Plan ahead and you will retire with a decent lifestyle.