You probably have a good idea of how much income you currently need to support your family’s lifestyle. But how does that number equate for retirement?
Let’s look at several pressing issues involved in developing a sensible retirement income estimate:
· How do you envision your retirement days?
· What will be your major expenses?
· How will inflation affect your retirement?
· What asset amount is needed to achieve your desired retirement income?
How do you envision your retirement days? Retirement opens up an array of possibilities from pursuing your hobbies and catching up with family to traveling or starting a new business. Many retirees still work part-time, pursue volunteer work, or help out with community service. It’s important to consider how you want to spend your retirement days and plan now to enjoy yourself tomorrow.
What will be your major expenses in retirement? By retirement time, one of your main goals should be to minimize your major expenses. Your house should be paid off. Loans and credit cards should be instruments of the past. Then, the only major expenses that remain are items such as healthcare costs and vacations.
How will inflation affect your retirement? The same dollar today will not buy the same goods in the future. You have to take into account that goods and services will get more expensive as time passes. Inflation has been running between 2% to 3% per year.
What asset amount is needed to reach your desired retirement income? When looking at your assets for retirement purposes, keep in mind to consider only your investable assets. For instance, the appreciation on your house will not produce any income unless rented out or sold. A conservative estimate of assets in retirement will be an asset amount that can produce a 5% or lower distribution rate to fill in the income gap, the difference that investments can fill after all income sources, such as social security, have been taken into account.
Now, let’s give an overall example:
Dr. Smith is 50 years old and plans to retire in 10 years. His house will be paid off before retirement, his kids will have finished college, and no other major expenses will be incurred.
He has calculated that he will need $60,000 in today’s dollars for retirement. Let’s start off by calculating what $60,000 will be at a 2.5% inflation rate 10 years from now. This amount is $77,021.49.
Currently, he has $700,000 in investable assets and adds $40,000 per year to his retirement with an average return of 7% per year; this equals $1,968,349.
At a 5% withdrawal rate, he will be taking out $98,417 per year. If you take out 20% for taxes, Dr. Smith will have an income of $78,733.96, hitting his income goal in retirement. In a real case situation, you would also need to consider the amount of your social security benefit.
For many Americans retirement is proving to be more exciting than ever and it is important to prepare for a retirement that can keep up with you. Reviewing your income needs will allow you to retire with a peace of mind, knowing that you will have financial security. With the right planning, your retirement years can be a success.
Chad is owner of the firm The Olivier Group, LLC in Baton Rouge, LA., which specializes in retirement planning and wealth management . Chad is a contributing writer of Wealth Management articles for the Journal of the Louisiana Dental Assoc. Securities and Financial Planning offered through Linsco/Private Ledger Member NASD/SIPC. Please note that the article is for informational purposes only. Financial Planning requires detailed individualized analysis of each person's specific situation
