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Doing the Retirement Math

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By 2gifts
January 7, 2008

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I worked this weekend in part on estimating retirement income needs...

We plan to retire in about 6-8 years when the kids finish college. That will make us 56/57-58/59, and is well within our plans, so I have been doing our retirement planning for some time. What I've done that has been helpful is to write down our current spending, and then make estimates in retirement based on that so that I can have a feel for what we will need per year in retirement. For us, that works out to be my current salary.

I have done things like assume the mortgage is paid, but have reallocated the mortgage payment to medical expenses because we will have to provide our own medical insurance.

I have eliminated the college savings for the kids, but reallocated a fair chunk of that to travel expenses so that we can go visit them frequently.

I have cut back the grocery budget, but seriously increased the dining out category.

I have moved some of the current discretionary child spending over to our own entertainment category as golf is expensive, and that's what we like to do.

Although we will most likely downsize when the kids move, and even in this market, we will most likely see the maximum tax-free profit, I do not count that anywhere in my plans because we do have to live somewhere, and we may choose to trade this house in for 2 smaller houses, so there may be no cash left from the house to fund our retirement. You may want to consider something similar instead of assuming you'll have cash from the house sale if you want to be more on the conservative side.

I think if you do something similar, you will have a good feel for what you spend now, and what you may spend later. I don't know if this is what you have done, but thought it worth suggesting as I have found this exercise to be very worthwhile in helping us to plan our retirement needs. I keep this in a Excel spreadsheet and do update at least annually.

You are fortunate if you get any sort of pension. Neither DH nor I will get a pension, so we have to provide all our retirement income. There may be Social Security for us, but we cannot fully collect until we are 67 1/2 anyhow, and by then, I wouldn't be surprised at all to see it being means tested, so I don't count on it at all. You are much closer, so your Social Security benefits will most likely be there, though they may change over time. I'm not as sure as you on the pension since those have been known to go away and lose benefits. It wouldn't be the first time that a company decreased their pension payouts and eliminated things such as medical benefits, so I'd recommend taking that into account as a possible scenario when doing your planning.