Having Enough in Retirement
By: Ernie Neve
What a difference a year makes! This time last year, we were all getting excited that the pandemic might be winding down, people were getting back to work, and it looked like some degree of normalcy would be returning to life.
As we’ve seen, that’s been true – to a certain degree.
We’re now dealing with record-setting inflation, and for those folks who are back at work and earning money, the question I keep hearing is “how do I stay on track for retirement?”
Let’s look at a few things you should be considering…
· Think about your budget
If you already have a budget, this part will be much easier, since you’ll be basing your future spending on your current spending. But if you don’t yet have a budget, take your current expenses from the last month and record them, either on paper or an Excel spreadsheet.
For variable expenses, such as an electricity bill, use the average of a year’s bills — so add up all the bills, divide by 12 and use that number as your estimate. This year is actually a good year to do this in, as we’ve seen prices really go up and we can expect at least some leveling of them in the coming years. For expenses that don’t require payment every month, such as an auto insurance premium, divide up the amount to determine approximately how much you’d be spending every month.
The great thing is, some expenses, such as debts like student loans, should disappear by the time retirement hits.
· Figure out how much you want to spend in retirement
In another column on the spreadsheet, write down what you think your budget will be in retirement, minus paid off debts. But be realistic — there may be fun items you’d like to create a budget for, such as travel, golf, eating out, or ballroom dance lessons. Once you’veadded up these expenses along with your monthly bills, you’ll have an estimate you can use to plan out what you’ll need in retirement.
Now, you’ll also need to use something called projected spending to calculate your estimated spending in retirement. Projected spending multiplies your current income by a certain percentage to determine how much you’d need in retirement. Though this method is not completely accurate, it does give you a good estimate to begin with when you start thinking about your retirement. Most often, the 80% rule is used, which says you should have a goal of replacing 80% of your pre-retirement income — or your average income you expect to earn 10 years before retirement.
If you’d rather be on the more conservative side when it comes to spending, use 90% in your calculations. You should also factor in any Social Security benefits you’re expecting, but I have to warn you – depending on Social Security is not in your best interest. Will it still be solvent when you retire? That’s anyone’s guess.
· Use the Four Percent Rule
One nice things about inflation this year, the Federal government is fighting it by raising interest rates. Already, those rates are at a nearly two-decade high and expected to get higher, which has finally made savings accounts and interest-bearing accounts relevant again. In essence, the 4% Rule is this: you can safely withdraw 4% of your retirement savings each year without running out of money.
Here’s a sample calculation to put this idea into perspective … Let’s assume you have retirement savings of $1 million, and your projected spending has been calculated to be around $3,000 a month. With the 4% rule, you could safely withdraw $40,000 per year from your retirement account, giving you about $3,333 per month to live on.
If Social Security stays solvent, you might have some additional retirement income to keep you well above the number you’ve calculated.
So, how much should you have at a certain age or income level? There’s no “right” answer, although many investment companies have tools and calculators available for you to punch numbers with.
Now, it’s a bit of a stretch to say that I’m the right person to speak to regarding this, so I’m not going to tell you to reach out for financial advice on your retirement.
On the other hand, my team and I can absolutely help your to potentially find more money in your paycheck to ensure you are getting back on track (or staying on it!) for the retirement you’ve always envisioned.