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Retirement income planning

How Much Will I Need?

 

It's the $64,000 question, though that's not the answer! How much money will you need to live in retirement? Some experts will say you need 70% to 80% of your pre-retirement income because your expenses should be lower in retirement. Others say you will need more, because your expenses will be higher (especially for health care and perhaps long-term care). Who's right? It depends!

Retirement Planning Calculators

Calculators


Your retirement calculations will depend on some questions that can be challenging to answer:

How long will I live?

The life expectancy of Americans born in 2005 rose to 77.9 years from 77.5 years in 2003, making it the highest on record. Life expectancy for women is 80.4 years on average, and 75.2 for men.

But you are not reading this as a toddler, and no one knows how long you will live, though you can consult government tables for an average based on your age. Ironically, the longer you live, the longer you are likely to live. Each year, medical advances make it even more feasible to survive to an even riper old age.

What will the cost of living be when I retire?

As we get older, we start looking back fondly at how cheap things like movies, cars and homes were in our youth. That's due to inflation, which is a sustained increase in the cost of goods or services. Thanks to inflation, what might look like a comfortable income today may seem downright meager 20 years from now. Keep this in mind as you calculate your retirement income needs and benefits in the following pages.

Fortunately, many retirement calculators, including those used on this Web site, allow you to estimate the effect of inflation. In addition, many union members' pensions, as well as Social Security benefits, include annual increases to help offset the higher cost of living.

Tip: The average annual inflation rate for the period from 1913 through 2006 has been 3.43%. Keep in mind, however, that inflation rates can fluctuate radically — e.g. it was 12.5% in 1980.

What will my expenses be in retirement?

It is true that some of your expenses might be lower in retirement. For example, your house may be paid off, and you may cut such work-related expenses as the cost of commuting from your budget.

On the other hand, your expenses could be higher. You may want to travel more, or enjoy activities you didn't have time for when you were working full-time, such as traveling, shopping or eating out more. And as you age, you may pay more for medical care, prescription medications and perhaps even long-term care. Or you might encounter expenses you had not planned for, such as providing financial help to a child or grandchild.

Will my investments grow, and by how much?

It's easy to rely on past averages when calculating what you expect your investments to earn, but it can be risky to rely on the past to predict what will happen in the future. One of your "jobs" in retirement will be to become knowledgeable about investments so you can keep an eye on yours.

Will my benefits last as long as I do?

The future of Social Security is being debated widely, and some employers are trying to cut back on retiree benefits. In addition, tax law changes may affect how much of your pension, Social Security or investment income will go to Uncle Sam.

Remember that while you can't answer these questions with certainty, there is one thing that is certain—a solid retirement savings, investment and income base is more important than ever. You won't complain about having too much money during retirement!

To do:

Create a budget.
Complete the retirement expenses calculators.
When you know how much you'll need, figure out how much you'll have.

 

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Where am I now?
How much will I need?
Social Security
Pension Plans
Employer-Sponsored Retirement Plans (401k, 403b, 457)
Individual Retirement Accounts (IRAs)
Annuities
Personal Savings
Home and Real Estate Investments
How much will I have?
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