Lifestyle
The first order of business for anyone retiring is define how much income you will need, yet it’s not as simple as it appears. Often times when people are describing their expenses to me, they list off their monthly bills, like house expenses, utilities, taxes, etc. When we subtotal that up, it’s typically far less than the wages they have been earning, or the distributions they are taking if already retired. What’s missing! The extras, the trips, the clothes and shoes, the new car, golf, tennis, boating, the grandkids – all of the other things that make life worth living. There is an important difference between the basics and the extras, and to create a robust plan, we need to really understand what your lifestyle will look like.
Inflation
Will this impact your plan? It most certainly will! If you are about to embark on your retirement, consider that the average price of food, clothing and general expenses 25 years ago, was less than half of what they are today. So another Fiscal Cliff that may be coming isn’t so much a cliff, but rather having a plan that can only support a fixed income level and then slowly over time, have your spending power eroded away. It’s a Fiscal Hill!
Longevity
The average age of a healthy 65 year old female is now 84 years old. And every year that number is moving up as healthy lifestyles become the norm and medical science moves forward at an impressive rate. Not long ago, very few lived into their 80’s and as retirees ponder the question how long do my resources need to last, how many years will I be relying on my hard earned savings to live, they often under guess. The reality now is that if you are a healthy 65 year old couple, there is more than a 50% chance that one of the two of you will live past 90. That’s right, no matter how old your parents were, or grandparents were, you need to be prepared to live for a long time!
Savings and Returns
The formula is actually very simple. Your retirement lifestyle will be equal to your income (things like Social Security and Pensions) plus whatever you take out of your savings each year. So how much can you safely take out?
This is the source of great debate and puffed up claims from every product and investment group out there. The generally accepted industry rule is you should not plan on taking more than 4% distributions from your savings each year. This is based on years of research and has been studied and tested through all manner of market conditions and history.
So this answers the question – how much do you need to retire. Take the amount you want to distribute from your portfolio each year and multiply by 25. For example, if you think you will need $2,500 a month from your savings, that’s $30,000 per year, times 25 is $750,000.
But what if that is not enough? Is there a better way? The short answer is that there are alternatives that can increase that income level, that can get you a better retirement, that bring back some of the extras you deserve. But for so many Americans, in an attempt to maintain an unaffordable lifestyle, they end up taking more than they should, and they are heading toward a Fiscal Cliff! To find out where you stand, book an appointment for our unique Fiscal Cliff analysis.
