Retirement and Financial Security – How Much is Enough? by Bob Lowry
The quick answer is, no one knows, including you.The amount you need to retire comfortably and live a satisfying retirement lifestyle is dependent on so many variable that a definitive answer is impossible. That doesn’t stop all sorts of web sites, blog posts, financial advisors, and others from giving you their opinion. I caution you to use what you learn in this manner only as a piece of the total puzzle, not the ultimate solution.
It shouldn’t be surprising that I am not going to give you a hard and fast number either. But, I am willing (or foolish enough) to take a look at some of the factors that will help you arrive at the “magic” number for you.
What is First?
The first step is to assess your expected income. While many of us lived our working lives spending more than we made, that was dangerous then, and fatal now. Once you retire, if you spend more than you have resources to support you could be in big trouble. Why? Simply because you cannot predict the future: what will happen to your income stream, your health, even how long you will live.
Retirement income comes from several sources. For most folks your pension, 401(k), IRA, annuities (a contract between an individual and an insurance company promising lifelong income in exchange for an upfront payment), and other investments will be an important source of financial support. Take the time to figure out exactly what you have and what they are likely to produce for you on a consistent basis. If you are unsure, now is the time to get a firm grasp on your assets, and make any adjustments as needed.
Based on those sources, you can use a basic retirement withdrawal calculator to predict how long the money will last if you withdrawal a certain amount each month. As you do so, don’t forget to factor in your best guess for inflation, whether you want to leave money to family, any tax consequences, and appreciation of hard assists, like art or classic autos.
Social Security is another pillar of your financial house. The government web site provides a calculator that allows you to predict what your monthly checks will be, depending on when you begin accepting checks. If you missed it, read a post from a few months ago , How To Decide When To Start Social Security
Do you expect any inheritance from a parent or relative? While I strongly suggest you don’t count on this money for part of your planning, knowing it may be there for you at some point in the future allows you to make “what if” plans.
It is Budget Time
Next, as I wrote about 6 weeks ago, develop a retirement budget. You will have certain expenses that continue whether you are working or not. If you own a home property taxes aren’t about to cease. Cars will probably be needed well into your satisfying retirement; remember to plan for both repair and replacement. Food, utilities, vacations, health care costs, clothing…these things will continue.
Note: In Monday, December 3rd NY Times Business section, see the excellent article on the reason to budget.
What will take some real thought on your part is the shape you want your retirement to take. Do you have plans to travel extensively or buy a vacation home near that favorite lake or ocean? Do you want to see family members on a more regular basis which means more travel? Is an RV and the open road calling you?
Or, are you anticipating a simpler lifestyle, one that keeps you closer to home. Are you content to explore opportunities to become involved and volunteer in your own backyard? Are you thinking of downsizing your living space to save expenses and work?
What about adult children or parents? Will they be part of your life both in terms of time and expenses? Should you budget for extra money in case your parents end up needing substantial financial support?
Obviously, a large factor is deciding which of these retirement lifestyles (or a combination of them) you plan for is determined by your income. I’ve always wanted an RV, but the budget to buy and maintain one didn’t exist for several years. I’d spend my summers in Flagstaff but not wanting to be away from family that long makes even that 3 hour distance not feasible at this time. I retired before my financial foundation was where I expected it to be. Through a conservative lifestyle and prudent budgeting things are just fine. But, I determined early on the champagne lifestyle wasn’t going to happen on my beer and wine budget.
Things Change: Plan For It
Importantly, my desires for that lifestyle changed. It no longer appealed to me. Being home, with family and friends is what makes a satisfying retirement for me now. Volunteer work with Junior Achievement and the Friends of the Library and the simple pleasures of reading and enjoying all Arizona has to offer are what I aspire to now.
The bottom line for you: pick the lifestyle you think you want to retire to and budget for it. If the numbers work for you, great. If they don’t figure out where you can prune while still maintaining what is most important. But, don’t be surprised if your goals change as you move through this stage of life. It is the rare person who can predict at the beginning of retirement what his or her interests and desires will be 10 or 15 years down the road.
One more hint: I believe there are three retirement lifestyle phases. If you love to travel and explore you are much more likely to do that in the first decade or two of retirement. If you want to scuba dive the ship wrecks off the coast of Bermuda, don’t wait too long (I’ve done that and it is a blast!). That means your budget will show dramatic shifts over time. What you set aside for travel in the early phase will taper off, to be replaced with higher expenses in health care or maybe dining out.
How much money is enough to retire comfortably? The simple answer is enough to allow you to live the way you would like to at each stage of your retirement lifestyle tempered by the reality of your financial foundation.
The real answer is not one really knows, including you, until you are in the midst of it. The best you can do is plan well, adjust as needed, and be happy with what you have. The most miserable risk in retirement is not running out of money, it is running out of the joy and satisfaction that retirement can mean for you.
By Bob Lowry