Good health is wonderful. So is a nice place to live. But what you really need when you retire is money — money to pay your bills, and enough left over to do the things you want. The general rule of thumb is this: You’ll need 70% to 85% of what you’re spending before you retire, adjusted annually for inflation, more if you have expensive hobbies or plan to travel extensively. For example, if your gross income while you stop working is $6,000 a month — that’s $72,000 a year — you’ll probably need $4,800 a month, or about $57,600, in the first year, after you retire.
UP OR DOWN?
You can be pretty sure some of your living expenses will shrink after you retire, but others are equally certain to go up. Planning your financial future includes anticipating those changes.
WHAT COSTS LESS
- By the time you retire, you’ll probably have paid off your mortgage.
- Unless you were older than average when your children were born, you will have finished paying for their educations.
- If you commuted to work, you’ll probably spend less on day-to-day travel and restaurant meals. You may need only one car, and will probably spend less on clothes and make fewer visits to the dry cleaner.
A MATTER OF TIMING
If you start investing when you begin working — perhaps 35 or more years before you plan to retire, and you put away 10% of what you earn each year, you should have a headstart on your long-term financial security.
For each year you delay, you’ll have to put aside a larger percentage of your annual earnings to build the same level of reserves as someone who began at an earlier age.
Chances are you’ll have a hard time finding that much money to invest, no matter how important you know it is to save. And the fewer years your assets have to compound, the harder they can be hit by a market downturn.
WHAT COSTS MORE
- Home maintenance costs and property taxes tend to go up, not down, over time, unless you move to a smaller place or to a state with lower taxes.
- If you’re home all the time, your utility bills may increase.
- Home and car insurance are apt to increase.
- Medical expenses, including the cost of insurance, often increase significantly over preretirement costs. These costs and the cost of insurance to cover them will probably continue to rise as employers cut back on healthcare coverage in general, and for retirees in particular.
Inflation is another factor you have to consider when planning your retirement budget. If you were retiring this June, for example, you’d need 80% of what you were spending in May. But next June you’d need more money to pay for the same goods and services.
That’s because of inflation, the gradual increase in the cost of living. Inflation has averaged 3% in the United States since 1926. It has sometimes been substantially higher though, hitting 13.5% in 1980 and averaging 6% through the ’80s.
That means if you’re planning on a 20-year retirement, you may need more than double the income in the 20th year than you do in the first, just to stay even. How can you manage that, especially if you’re not working anymore? The surest way is by earning money on your investments, at a rate that tops the rate of inflation.
You may have certain special advantages in planning your financial future. Veterans, for example, can apply for mortgages, healthcare coverage, and disability benefits through the Department of Veterans Affairs. They may also qualify for local tax breaks, and get pension credit for their years of active service.
Union members and members of professional and other organizations may qualify for health and life insurance at lower rates than those available to the general population, or for other kinds of reduced-rate goods and services. Sometimes members of the clergy are offered discounts too.
In any case, you should check with any groups you’re part of for the long-term financial advantages that may come with your membership. The larger ones may also keep you up to date on tax and other changes that affect your finances directly, through newsletters, journals, or other publications.
DOING THE MATH
While it might take a long time to estimate your retirement needs if you were doing the math yourself, you can use one of the retirement planning calculators available on financial services and educational websites or on a CD.
Some of these programs, and a number of the websites, have been developed primarily to provide an independent planning resource. Others are sponsored by mutual fund companies or brokerage firms that offer planning that incorporates an introduction to their own products and services.
These are generally easy to use. All you have to do is plug in the financial information they ask for, along with details about your plans for the future. They will figure out how much more you’ll need to invest to have enough money to retire.
If a financial planner or bank officer does the analysis for you, he or she may be using programs similar to the ones you would have used yourself. But they are able to provide valuable advice about how you might invest or rebalance the investments you have — and the encouragement to get started.