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Retirement Needs, Part 2
Pick a number, any number...
by Ann Coleman (TMF [email protected])
Alexandria, VA (July 1, 1999) -- Depressed? Monday I suggested you think about what kind of annual income you will need when you retire and suggested that you customize that number for your lifestyle and expected expenses rather than accepting any kind of rule of thumb.
I'll bet that, for some of you, it was a bigger number than you thought. Depressing, eh?
There's good news on the horizon, but first, let's come up with a number. Just to have something to talk about. Forget about inflation and forget about cost of living increases for the moment. Just think about what your life costs you at the moment and what it would cost you if you were retired instead of working. Would you sell your house? Would you still be putting that last kid through college?
Some expenses that you can reasonably expect to be lower if you choose to lower them are housing, car expenses, savings, and even taxes if your income needs drop you into a lower tax bracket or if a significant portion of your retirement income is supplied by a Roth IRA. And you get an automatic 7% bonus since you won't be paying Social Security and Medicare taxes any more. On the other hand, as Pat McMahon of Aurora, Colorado wrote:
I have been retired for 6 1/2 yrs now. I have found that you actually need more money than previously because now you have 8+ hours a day to kill. Unless you are crippled you will want to do something with that time. Travel, golf, movies, plays, eat out, etc. Every activity seems to cost money.
Also most of us have experienced a continual higher standard of living as we have aged. Our 30s were higher than our 20s, our 40s were higher than our 30s, etc. This expectation of ever increasing standard of living does not go away. Once you are used to 5 star service, 4 star does not cut it anymore.
Anyway I advise my friends to count on 133% of pre retirement income for a comfortable retirement.
Pat makes an excellent point, but the other side of the coin is how much fun in retirement can you afford based on your current financial responsibilities? Again, there's good news coming on that front. In the meantime, I hope this kind of generalized discussion has stimulated you to develop a ballpark figure in your mind of the kind of income, in today's dollars, that you would allow you to maintain your current lifestyle, with appropriate modifications, in retirement.
For purposes of discussion, I'm going to use $50,000 as the hypothetical figure. That's $50,000 in today's dollars. We'll adjust for inflation tomorrow. Now the big question becomes what kind of resources you need to fund that kind of income. Well, here we have to do a lot more thinking.
One of the traditional ways to calculate how much savings you will need is to assume a certain life span and calculate a withdrawal rate that, combined with an expected rate of return on the cash, will leave you with X dollars at that age. X is the cash portion of your estate. For some people X may be 0. Others may prefer a sizable X for their heirs.
I have a radical suggestion when it comes to X. It's not for everyone, but it's worth considering. Here it is: Aim for an X that is greater than the amount that you start out with on the day you retire.
This is a very conservative approach, but, with the good news that's coming up, it's much more possible that you might think. Considering the horror with which most people contemplate the words "outliving your money," I think it is worth considering for peace of mind if nothing else.
For one thing, your life expectancy may be higher than you think. Just having lived this long (and this is true whether you are 15 or 95), your life expectancy is actually higher than the quoted "life expectancy at birth" numbers you are used to seeing. Click this link for a comparison of life expectancy tables from the U.S. Census. Note that life expectancy at birth is 72.5 for males and 79.3 for females, but if you are already a 65-year-old female, you can expect to live another 19 years -- five years beyond that life expectancy at birth -- and if you are in excellent health and had long-lived grandparents, your three score and ten could easily stretch out to four score and ten. Here's a link to a calculator for life expectancy based on your current age: Life Calculator.
The problem with life expectancy tables is that they don't tell you a darn thing about how long your money has to last. I've heard from several folks who deplore the practice of over-conservative planning that leaves you with a huge estate and, presumably, cramps your style during the golden years. But I think that if you can possibly manage it, living strictly off your portfolio's gains and not dipping into the principal is a far safer approach.
It's not impossible. If you are young enough, it's not even that hard. Tomorrow, I will illustrate how.
Fool on and prosper!
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Stock Change Last -------------------- CAT +1 3/16 61.19 JPM - 1/4 140.25 MMM + 1/4 87.19 IP - 1/2 49.75
Day Month Year History FOOL-4 +0.37% 0.37% 26.23% 28.10% DJIA +0.87% 0.87% 21.32% 20.83% S&P 500 +0.60% 0.60% 12.92% 13.20% NASDAQ +0.77% 0.77% 23.42% 25.11% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 61.19 42.03% 12/24/98 9 JP Morgan 105.51 140.25 32.93% 12/24/98 14 3M 73.57 87.19 18.51% 12/24/98 22 Int'l Paper 43.55 49.75 14.24% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1468.50 $434.50 12/24/98 9 JP Morgan 949.62 1262.25 $312.63 12/24/98 14 3M 1030.00 1220.63 $190.63 12/24/98 22 Int'l Paper 958.12 1094.50 $136.38 Dividends Received $49.99 Cash $28.26 TOTAL $5124.13