Don't Panic, Your "Retirement Number," is Lower than You Think
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Some assumptions we make can lead us to overestimate--by a large margin--how much we'll really need in retirement
- Stop Panicking: Your “Retirement Number” is Lower than You Think By PresenterMedia.com
- ONTARGET Don’t forget about taxes If you hold your retirement savings in a 401(k) or Traditional IRA, you’ll pay taxes on your disbursements. So, let’s up that “retirement number” to $1.1 million What We Are Commonly Told About Retirement Planning You will need to replace roughly 80% of your current income Let’s assume you’re 55, and make $50,000 (post-tax) per year, so you’ll need $40,000 per year in retirement You will need to save about 25 times whatever that number is, adjusted for inflation. That comes out to $1 million, in today’s dollars. Don’t count on Social Security to still be around
- ONTARGET Assuming you retire at 65, and adjusting your needs for inflation, your retirement number is: $1.5 million
- ONTARGET “But the average 55-year-old has less than $200,000 saved!” Things aren’t as bad as they seem. Many of these assumptions we are told about retirement are simply wrong! Here are six key points to remember
- ONTARGET Let’s Forget the 80% Rule and Start From Scratch
- ONTARGET IT’S WHAT YOU SPEND, NOT EARN! Point #1
- ONTARGET It’s what you spend, not what you earn • Replacing 80% of your earnings doesn’t help figure out what you need to continue the same lifestyle. • What matters is what you spend. • THAT is what constitutes your financial lifestyle • Let’s say you dutifully put away 10% of your salary every year. • Now, you need about $45,000 per year (with a nice safety margin)
- ONTARGET Your new retirement number, adjusted for inflation, is now: $1.7 million *Remember, we ditched the 80% rule, that’s why the number is higher…for now
- ONTARGET YOU’VE LIKELY PAID THE MORTGAGE OFF Point #2
- ONTARGET You’ve paid the mortgage off • Mortgages typically account for 70% of housing costs • The average home in America spends $17,000 on housing. • Because your mortgage is paid off, that’s $12,000 you’re no longer paying. • Your yearly needs just dipped to $33,000
- ONTARGET Your new “retirement number,” adjusted for inflation, is: $1.22 million
- ONTARGET NO MORE LIFE/DISABILITY INSURANCE Point #3
- ONTARGET No more life or disability insurance Think about it: • Life insurance is to replace your earnings if you pass away • If you’re retired, you aren’t earning anymore • Disability insurance is to replace your earnings if you become disabled. • Again, you aren’t earning anymore
- ONTARGET Insurance (Cont’d) However, one area that will likely increase is medical spending—which includes out-of-pocket and insurance premium payments. • It’s highly unlikely that increased medical costs will outweigh the benefits of no longer paying for life or disability insurance. • However, for argument’s sake and to build in a nice margin of safety, let’s say it’s a wash.
- ONTARGET Your new “retirement number,” adjusted for inflation, remains: $1.22 million
- ONTARGET SPENDING LESS ON FOOD Point #4
- ONTARGET Spending less on food • Several studies have found that retirees spend less on food at home after they retire. • The reasoning is that they have more time to prepare food on their own, which is cheaper than pre-prepared food. • The average American family spends $4,000 per year on food at home. • Let’s assume a modest 10% downtick in spending. • You now need $32,600 per year in retirement
- ONTARGET Your new “retirement number,” adjusted for inflation, is now: $1.20 million
- ONTARGET YOU DRIVE LESS Point #5
- ONTARGET You drive less • Commuting is a major part of our working lives. • Though you’ll still use your car, it’ll be far less than before. • According to a recent study by Frontier Group, retirees drive about 35% less, for a total of 8,200 miles per year. • If the average car gets 25 mpg and the average cost for a gallon of gas is $3.75, you’ll spend $650 less on gas per year
- ONTARGET Your new “retirement number,” adjusted for inflation, is now: $1.18 million
- ONTARGET SOCIAL SECURITY WON’T DISAPPEAR Point #6
- ONTARGET Social Security won’t disappear • Don’t get me wrong here, it doesn’t hurt to be safe without Social Security. • But it’s very unlikely that the program will disappear altogether. • To build in a margin of safety, assume that your benefits will be cut in half by retirement time. • That means you’ll get $8,800 per year from Social Security.
- ONTARGET Your new “retirement number,” adjusted for inflation, is now: $855,000 That is roughly 57% of the amount we had at the beginning of the exercise
- ONTARGET What this does NOT mean 1. This does NOT mean saving for retirement is easy, or should be taken lightly. 2. This does NOT mean you should put off savings and spend your money on other things—the Hedonic treadmill is a tough one to get off. 3. This does NOT mean your own situation will mimic this example. Take all of these factors into consideration, but understand that its up to YOU to figure out what kind of lifestyle you want in retirement, and how to best reach that goal.
- ONTARGET Here’s Your First Step Towards Retirement Goals We have prepared a special free report to help you reach your goal. Click to read: Take Advantage of This Little- Known IRS Rule