It sure would be nice if there was some way to be absolutely
certain the money won't run out.
Stacy Johnson • July
26, 2021
Hoping to retire soon? Congratulations! But are you sure
you’re financially ready?
Almost everyone who contemplates retirement asks themselves
this question. That includes Money Talks News reader Steve:
“I am 67, and Carolyn is 63. If we both work till 70 (the
plan), we will have combined Social Security incomes of over $6,000 per month.
We’ll have no mortgage and between $800,000 to $1 million in savings. We are
stressing about retirement and would like to relax a bit. Can we?”
OK, Steve, let’s discuss.
Steve says he and his wife plan on working until they’re 70.
Combined, they’ll get more than $6,000 a month from Social Security, and
they’ll have close to $1 million in savings. So let me ask you: Will they have
enough?
Answer? There’s no way to know without knowing what they
plan to spend.
If you’re approaching retirement, here are two simple steps
to figure out if you’ll have enough.
Step 1: Figure out
what you’ll have
Steve did a good job of guessing how much he’s going to have
when he retires: about a million bucks. But here’s something he could also do:
Figure out how much that could add to his income.
You can do this by dividing your total expected savings by
your life expectancy. Example: Say, like Steve, you’re going to retire at 70
and expect to have a total of $1 million in savings. You estimate your joint
life expectancy is 20 years. Divide $1 million by 20 years, and you get $50,000
a year.
Now, Steve has a very rough estimate of how much monthly
money his savings will generate, providing he’s willing to spend down his
capital. Add the couple’s Social Security of $6,000 a month, or $72,000 a year,
and Steve and his wife can expect to bring in $122,000 a year.
Obviously, we hope Steve and his wife will be growing their
savings during retirement, not simply spending their principal. This exercise
is a quick, down-and-dirty computation.
Again, take what you’ll have in savings, divide it by your
life expectancy, add what you’ll get from other sources, and you’ve got a quick
income number to work with.
Step 2: Figure out
how much you’ll need
All things being equal, you’re probably not going to need as
much income in retirement as you’re spending now. On the other hand, depending
on how you intend to spend your retirement years, you could be spending more
than you are today.
Either way, retirement planning means confronting your
future. Are you going to be sitting on the porch or staying in luxury hotels as
you travel around the world?
If you have no idea or can’t imagine how much you’ll spend
during your retirement years, use the amount you’re spending now.
If you don’t know how much you’re spending now, this is a
great time to figure it out. Use some sort of budgeting app — such as Money
Talks News partner YNAB (You Need A Budget) — or simply
write down everything you spend until you have a handle on it.
After going through these two steps, you’ll have at least
some kind of idea whether you’ll have enough. Granted, this is an exceedingly
simple look. You can — and should — drill down a lot more.:
The sooner, the
better
One last tip: When it comes to retirement planning, the
sooner the better.
There’s no reason to feel like an idiot if retirement is
approaching and you don’t have enough. Plan early; you’ll have more options.
Maybe you can put away more. Maybe you can get a side job and make more money.
Or, maybe you can think about where you might be able to live for less when you
retire.
In short, the sooner you start confronting your likely
retirement reality, the better off you’re going to be.
Make sense?
Hope that answers your question, Steve.
About me
I founded Money Talks News in 1991. I’m a CPA, and I’ve also
earned licenses in stocks, commodities, options principal, mutual funds, life
insurance, securities supervisor and real estate.
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Disclosure: The information you read here is always
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