A line penned by our marketing Fools recently caught my eye. The tagline appears on a page announcing a new retirement product launch. It reads: "The second half of life should be as good or better than the first."
It's a simple statement that most of us probably read and think, "Hear, hear!" Then I read it again. "The second half of life should be as good or better than the first."
Half of life? We'll spend half of our lives as retirees?
Yup. Thanks to low carb diets, multi-vitamins and Sweatin' To the Oldies reruns on cable, there's a good chance that you'll roam this wonderful planet longer than any of your ancestors dreamed possible. It's not a huge stretch to imagine spending almost as many years as a "retiree" than as a 9-to-5er.
So there's Life, Part I: Learn to walk, do homework, write resume, work, fall in love, build nest egg, network, provide for family, have occasional elective surgery. Life, Part II: All that stuff you've always said you wanted to do.
Put that way, it seems like it might be a good idea to put some thought into this second phase of life. Surprisingly, less than half of us do. A 2002 survey by the Certified Financial Planner Board of Standards found that half of the 1,000 upper-income survey respondents have a formal financial plan. And the majority of those who do review it just once a year. That doesn't sound like a lot of thought going into the second half of life, does it?
When it comes to retirement, we can hope that it's all it's cracked up to be. Or we can make sure it is.
The wonder years
The foundation of retirement planning is knowing if you'll be able to cover your expenses year in and year out. A wise retiree on our discussion boards said: "One of the biggest problems with retirement planning is deciding how much you spend every year. I'm surviving because I've done my homework."
It doesn't take much to remove the guesswork from your future. Just look at the concrete paper trail you're currently creating. Today's expenses hint strongly at tomorrow's bills. Taking a gander at your checkbook register can answer a few of those retirement question marks.
What is your current spending? What are your job-related expenses, kid-related costs, insurance, the mortgage, and your retirement plan contributions? Do you have any money set aside for emergencies? In short, what does it cost to be you?
A quick-and-dirty answer to that question can be had in three steps:
Gather a month's worth of paychecks (or retirement account withdrawals if you're already retired). Voila! There's the income side of your ledger
Now add up the must-pay bills - you know, the stuff that keeps food in your tummy, a roof over your head, and a comfortable indoor temperature of 71.3 degrees. These must-pay bills include: Your mortgage/rent, utility bills, insurance payments (take the annual cost and divide it by 12), and your current retirement contributions (if you're still making them).
Subtract your must-pay bills from your income, and you have a cursory take on your current discretionary income -- meaning, the money you have left over.
Now you have a really rough take on your current cash flow. The more specific you are, the fewer surprises will rear their ugly head in the future.
What about the future costs of being you? Consider the expenses that will go away -- those job-related bills, putting the kids through college, retirement contributions. But don't assume that'll all be extra money. The future holds different bills -- medical, travel, toys for the grandkids. Better safe then sorry when planning for Life, Part II expenses.
As long as we're getting just a rough idea of what the future holds, let's see how far our current savings will take us. For some back-of-the-envelope accounting, use this Ballpark Estimator worksheet.
A gift for your future
Looking at the numbers, you may be feeling a little more generous towards your future self. How about upping the contribution to your work retirement plan? Even a few percentage points can make a big difference in the long term, and it's painless in the short term. Go ahead and increase your 401(k) contribution. Simply ask your human resources department for the proper contribution change form.
Don't stop now. With visions of retirement dancing in your head, go with the momentum and give your retirement savings a bonus gift. Send an IRA contribution check to your brokerage account for the year 2004. There's a $3,000 limit, but whatever you can afford right now is great. Don't have an IRA set up yet? It's easy to do through a discount broker. What are you waiting for?
Now re-run those cocktail napkin calculations. See? Already the second half of your life is looking brighter. As my copy-writer co-worker aptly wrote: Plan well... retire wealthy. Hear, hear!
Dayana Yochim plans to eat more leafy greens during the second half of her life. The Motley Fool is future retirees writing for other future retirees.