An individual’s income needs during retirement are based on a number of factors that can be very unique per individual. A solid self-analysis is needed, which can take some thought but the good thing is that once the analysis is completed then the resulting income amounts required are just math.
If an individual’s annual income today is $60,000 and they are thinking of
retirement they must first determine annual ongoing needs. Start with the $60,000 and subtract taxes, annual savings, work clothing expenses and gas mileage to work. Also subtract any payments for the following that will be paid off done by retirement age; such as child support, auto loans, credit card debt and house payments. Obviously targeting paying off debt prior to retirement helps reduce needed funds significantly. Add potential increased expenses for health care and retirement activities such as extensive travel.
The resulting number will likely be between 50% and 80% of your current annual income. Many people utilize 70% as a rule of thumb but don’t panic if your number is 50%. Someone who lives conservatively, saving a high percentage of income and looking to be debt free by retirement could be fine living with 50% of pre-retirement income. For example here however I will use 70% resulting in post-retirement income need of $42,000 per year.
So how does someone generate the needed $42,000 per year? Again it is basic math.
Assumptions:
* Retire at 66
* Life expectancy 85 with goal to leave $.00 to heirs
* 6% annual return on investments (reasonably conservative)
* Social security benefits = $1,000 per month
Social Security picks up $12,000 of your retirement needs leaving $30,000 annually to be gained from drawing down savings. This $30,000 will be needed each of the 19 years of retirement.
Calculations:
Future Value (FV) = 0 (amount left at 85)
Interest rate (I/Y) = 6% (interest on investments)
Years (N) = 19 (years of retirement)
Payments (PMT) = $30,000 (amount taken out each year)
The amount needed at retirement date to support the above scenario = $334,743. This is just an illustration assuming no post-retirement working income and simplistic annual interest calculations and payouts. To many the math however is staggering…most people do not realize the appropriate amount of savings needed for retirement years.
Being a simple example unfortunately a missing piece is the impact of inflation. Inflation only makes the need for baseline savings higher. Several excellent calculators exist from Fidelity and http://www.dinkytown.com/java/RetirementPlan.html which portray
numbers including inflation.
Happy savings! Prepare by doing the math.