How Much Will It Take: Retirement Income
For the average individual, thoughts of retirement can be very pleasant. Some of those thoughts include traveling, scheduling your own day, spending time with the grandchildren, spending the majority of one's time on the golf course, etc.
However, the hard cold reality is that there will still be bills to pay. Those bills are typically the ones that families struggle with on a month to month basis. In addition, the other reality check is that there may be added medical expenses or special needs that are associated with getting older.
Therefore, it is important that individuals plan for their retirement. Obviously, the most important question is how much retirement income is needed, but just as important are other questions surrounding finances when strategizing about retirement planning. Those additional questions surround projected expenses and other associated variables.
Current Income
When planning for retirement, a good starting point for assessing what retirement income will be needed is to start with one's current level of income. A good rule of thumb is the 70% rule.
This rule simply states that it would take 70% of one's current income to retire and maintain the same level of comfort that one is enjoying at the present moment. However, it is important to note that this is a broad rule of thumb and not necessarily meant for everyone.
Those differentiating factors that may make this rule of thumb different for some folks can be due to a number of circumstances. For example, one of those factors maybe specific retirement plans. If an individual plans on traveling in a recreational vehicle it is important to consider the added income needed for fuel. Or, with the tenuous circumstances surrounding Social Security, one may not want to count on full retirement benefits.
Projected Expenses
As consideration of retirement income is necessary for the plus side of the ledger equally as important is the negative side of the ledger. This negative side of the ledger is the consideration of projected expenses.
When thinking about projected expenses, remember to consider all of the expenses associated with living prior to retirement. Those expenses include food, clothing, transportation, insurance, upkeep on a home, utilities, healthcare, recreation, saving, etc.
Also, it is a sobering fact that as we get older the quality of our health may suffer. In addition, the need for prescription medication may increase. Therefore, it is important to increase the line item associated with medical expenses or a line item for contingencies.
Finally, when planning your retirement income and expense budget, remember that the value of money in today's economy may not provide the same buying power tomorrow. Consequently, it is important to figure in an inflation factor. Generally, a 3% annual rate of inflation is utilized by financial planners.
Other Variables
One additional variable in considering retirement income is the individual's anticipated life expectancy. This is important as it directly relates to the amount of money that will be needed to sustain your lifestyle.
Obviously, no one knows when their demise will occur, but there are ways to estimate the individual's life expectancy. Two particular ways are based on family history and insurance tables.
