I thought about this question a lot in the years just before I retired, I think about it more now that I have been fully retired for a year and a half. Given that I managed pension and 401(k) plans and conducted retirement planning programs, you would think the answer would come easy to me; you know what, it does.
Conventional wisdom says you need less income than before retirement because once you are retired you have no need to save and you don’t have the expenses associated with work. Unless you are planning to give up lunch for the rest of your life and plan to draw large lump sums from your retirement nest egg to deal with those emergencies that will inevitably come your way, don’t believe any of that nonsense.
One thing you can be sure of is that if some expenses go down when you retire others will go up and up and up.
There are numerous calculators and planners out there for you to take a look at and use for free, they will ask you to put in all kinds of nifty numbers and assumptions and voila’, they will tell you what percentage of your pre-retirement income you need in retirement. Go ahead, give them a try, it’s worth the experience and the resulting depression.
Unless you plan to live in a cave and admire the prehistoric drawings on the walls all day, you are going to need money and each year that goes by you are going to need more money. Consider this, let’s say you were a good saver and at retirement you accumulated $1,000,000 in assets (probably pre-tax so you really don’t have $1 million in the bank to use). In today’s market that will buy you an annuity paying about $6,345 per month for life or $76,140 a year before taxes. Not bad huh? Of course, there are two things to consider; first that amount never increases and second, upon your death the payments stop, over, done, kaput…now call in your spouse and let her (or him) read this.
Just because you are retired doesn’t mean you don’t need an emergency fund. Even if you have a steady guaranteed income, you still need cash if a financial emergency strikes, where are you going to get it if you don’t put money away periodically (otherwise known as saving)? Let’s say you don’t have a steady guaranteed income from a pension or annuity, but rather you are managing your own investments and withdrawals from your 401(k) or IRA, where are you going to get the ten grand for a new roof, take it from your 401(k)? Go ahead and see where that extra unplanned withdrawal gets you in a few years. Even if you borrow the money, you now have a new loan payment.
Here is the plan, use all the calculators you can get your hands on, listen to all the advice out there, look closely at all your expenses and the things you want to do in retirement and then . . . give my opinion at least a passing consideration.
Your goals for retirement should be (1) start with 100% replacement of pre-retirement income, (2) have a plan to have that amount increase with inflation and (3) figure out what additional income be it life insurance, a big pile of cash or a joint and survivor annuity you need so that any dependent survivors will have the income they need for the rest of their lives (an alternative plan here is to marry a much older women).
By the way, when I say you need 100% income replacement, it means 100% from all sources including Social Security and any investment income you may generate on a regular basis such as dividends.
See I told you the answer was easy to come by.
Related articles
- How long will my retirement savings last? (money.cnn.com)
- Should I Pull Money From My 401k? (turbotax.intuit.com)
- Raiding Your 401(k) Can Be Taxing (turbotax.intuit.com)
- Retiring: Tax Tips (turbotax.intuit.com)
- How to Prevent Outliving your Retirement Savings (retirementmoney.wordpress.com)
- Let’s Look at Women’s Retirement (moneygal2020.wordpress.com)
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