We hear a lot of the same questions over and over. It tends to happen when you’ve been in business as long as we have and you’ve helped as many retirees and soon-to-be-retirees with their planning as we have. We thought it would be a good idea to answer a couple of these questions every week.
Please note this very important fact. Our answers do not take into account your particular investment objectives, financial situation, or risk tolerance and may not be suitable for all investors. Our answers are not financial advice and should not be taken as advice. This material is provided for educational purposes only.
How much income will I need each month in retirement?
Earlier we talked about how much money you need in retirement. And this question—how much monthly income—sounds the same, but it’s a little different. Here’s why. Let’s think of money as that big pool of money you’ve saved and grown your entire working life. Your income is that monthly block you used to pay bills and regular expenses. Both are the same in that they are both blocks of money that you earned. The difference is in how they’re used.
Knowing how much income you will need to retire depends entirely on how you are living today and how you plan to live in the future. This is what we call an income plan. How we make an income plan starts by looking at your existing budget and lifestyle. Are you a big traveler? Do you dine out a lot? Are you supporting anyone’s education and will that continue for a lengthy period of time? Then we look to anticipate your future needs as you age and work with you to dial in your goals and dreams in retirement. If you don’t travel now, do you plan to travel once you’re not working? Are you wanting to renovate your home or move somewhere else (it’s a little-known fact, but every retiree plans to redo their kitchen as their first big remodel)? From there, we can reasonably formulate your income plan. For years, the rule of thumb was retirees would need about 80% of their working income in retirement. Depending on lifestyle and depending on health, that can easily be 100% or even 120% in retirement.
Once you know how much monthly income you will need in retirement, we can work with you to figure out how you get that income every month in retirement. It’s not always as easy as Social Security + a withdrawal from savings. Plans differ. Goals differ. Finances differ. The best way to determine how much income you need and where that income will come from is to work with a trusted financial advisor to find the solution that works best for you.
How do I estimate my life expectancy for planning purposes?
Figuring out the best way to estimate how long you will live is a difficult question regardless of the circumstances. Trying to figure out how long you will live early enough that you know you’ll be able to save enough is even harder. No wonder life insurance companies have actuarial departments with thousands of employees to try and figure it out.
For the average person to try and guesstimate their own anticipated lifespan for retirement planning purposes, it’s best to think simple. How old are your parents, or how old were your parents when they passed? How about your grandparents, aunts, uncles, etc.? Is there a history of congenital issues or diseases raring up late in life?
From there, you can get a rough idea of how long you can reasonably expect to live before you start adding and subtracting based on your own lifestyle. Are you healthier than your parents were at your age? Are you a smoker, a drinker, or do you engage in any activities that may shorten your lifespan? Even factors like living near a highway, fossil fuel-consuming factory, or power plant can impact your expected lifespan.
Finally, no matter what number you figure out as your expected lifespan, you should always add a few years to the end of it. It’s better to have your money last longer than you do than to run out of money before you run out of time. And remember, as Billy Joel has said… “Only the good die young.”
Sadly… or thankfully… the only person you can trust when it comes to predicting when you will die is an executioner, but their warnings are typically rushed and there’s little time to plan after that. If you’d like some help with figuring it out with a little longer to go, let us know.