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katy @ ngenius.com

Can You Really Live On Less In Retirement?


Looking forward to retirement years, we’re all faced with the challenge of income replacement. There’s the generalized hope that Social Security will remain around for a while, or at least that neither our generation nor the next will be caught off guard by the timing of its demise. But no one really imagines that they’d be able to have more than a meager existence on SS alone, do they?

Some folks will have traditional pensions, though these are gradually going the way of the world. I know one couple who will have four pensions between them, since they both retired young from their first careers and then went on to acquire second pensioned jobs. Even without Social Security or a 401K, their pensions will cover their retirement needs, especially since their health care will also be provided. Granted, they never made enormous salaries during their working years, but still, as retirees their incomes will continue at nearly the full amount into perpetuity.

But what about those (such as the self-employed) whose 401Ks must be funded without matching percentages from an outside employer and who are responsible for raising the entire amount of the income they’ll need in retirement?

Here’s the basic plan we’ve settled upon: Decide how much $$$ we’ll need per year in retirement. We’ll base our decision either upon one of the many formulas found on the Internet, or by the tried and true method of guessing. We’ll plan to need a LOT for health care, way beyond what we’re imagining, since we have no idea what to expect from Medicare and will certainly need to supplement those benefits substantially. We won’t count on Medicare Part D (the prescription drug benefit) hanging around, just because today’s retirees are enjoying it.

And we’ll remember the enormous cost of long term care must somehow be planned for, also. If we don’t pay for long term care insurance, we’ve got to have lots more money put aside than otherwise, unless we decide that “going to Medicaid” is an acceptable alternative. (And that assumes Medicaid will still be providing long term care to the indigent.)

Once we’ve arrived at a yearly amount we think we can live on, we’ll do the rest of the math. Most financial advisors suggest retirees can withdraw 4% of their savings per year without touching the principal. So, if I think my husband and I can live comfortably on $40,000 per year (not counting Social Security), how much will we need to have set aside in retirement funds? We’ll need a cool million. If we need $60,000 per year, we’ll want to accumulate $1.5 million. And if $80,000 per year suits us, we’d better be shooting for $2 million.

(By the way, we’ll be looking at some of these formulas—-like the 4% solution—-in the days to come.)

For Americans who must come up with the loot on their own, these figures can seem overwhelming. Sometimes, for a bit of relief from the sticker shock, I like to come at it from the opposite direction. Here’s the way I think about it: For every $4000 per year we can cut our expenses in retirement (and yes, now would be a good time to begin practicing!), we’ll need $100,000 less in retirement funds when we begin withdrawing. If I planned on withdrawing $80 grand, but somehow pared back our budget to where we could make it work on $72 grand, we’d only need to shoot for accumulating $1.8 million instead of $2 million.

Whether it’s more difficult to stockpile that extra $200,000 or to live on somewhat less each month in retirement, it’s hard to say.

The only thing easy to predict is that no matter how you look at it, we’ll need a boatload of money.

And, by the way, when I say we? I mean you, too.

Posted by Katy on 05/19/08}
in Personal FinanceRetirement


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Are You a Late Boomer?

If looming retirement is catching you off-guard between an aging parent and a revolving-door kid, you might be. If you've delayed travel only to discover they've changed the names of all the countries, you are. And if you're a member of the Baby Boomer Generation who's ready to give back but you've forgotten where you put it, stay tuned. From healthcare to personal finance, from career changes to volunteerism, it's time to boom where you are planted.