How to determine the retirement savings need
How to determine the retirement savings need is a critical part of establishing long term retirement goals. We will break this down into retirement income needs and various income sources.
Income needs
Retirement income need is the dollar amount needed to support a desired lifestyle. quantifying this need years in advance is challenging and is complicated by the fact that some people look forward to substantial lifestyle changes during retirement. Costs, such as medical, may not be a static number throughout one’s retirement years. Because of these lifestyle changes, income needs are bound to vary considerably from those of preretirement years. Figuring them out is a key element of retirement planning.
What is your number?
Your number is the daunting amount – be it $500,000, $1 million, or $2 million – that must be accumulated in order to maintain one’s lifestyle in retirement. Most people don’t know their number. Less than half of prospective retirees have tried to determine how much money they’ll need to live on once their paychecks stop. The number is going to be large, and for many will be shocking and overwhelming, but it is difficult to make a plan if you don’t know what your ultimate goal is.
Create a budget
How to determine the retirement savings need? A budget can help improve and clarify financial outlooks by identifying what actions need to be taken in order to reach stated goals and objectives. Make a list of current living expenses – particularly nondiscretionary expenses (or needs) – and then adjust for which expenses will increase, which will decrease or go away, and which new expenses will appear based on the client’s goals.
Expenses which usually decrease during retirement
Many retirees find that they spend less on housing, often because their mortgages are paid off by the time they retire or because they sell their large homes and buy smaller, less expensive houses or condos. This may not be the case if a second home is in the plan. Don’t forget, though, that even paid-off home is not expense-free; real estate taxes, utilities, insurance, and repairs will remain.
Retirees also tend to spend less on parking, dry cleaning, apparel, and education than do non retirees.
Second cars for married couples are less necessary. Eliminating one vehicle reduces insurance expenses, vehicle registration taxes, license fees, and maintenance.
Expenditures for Social Security and retirement plans disappear.
Total income taxes may diminish in step with earned income reduction. Taxation, however, will be impacted by the amount of income coming from a qualified retirement plan, which will be fully taxable upon distribution.
Every day is a Saturday
People tend to assume that their expenses will drop dramatically in retirement. Some expenses, including the ones shown above, may drop, but other costs are likely to increase. Think about it. When do you spend the most money? Probably on Saturday, right? And once you retire, every day is a Saturday. Travel, golf, hobbies, dining out, and don’t forget about increasing medical expenses as you age – these things will add more quickly than most people realize, making postretirement income needs just about equal to his or her needs prior to retirement.
How to calculate a retirement saving need will help with inflation. Inflation has been referred to as the “silent killer’ of a portfolio’s value. It slowly and silently eats away at your client’s purchasing power until one day they realize that their income is no longer covering their needs.
How to Determine a Retirement Savings Need
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