Finance

Retirement Income – How to Ensure Yours Will Be Enough

It goes without saying that planning for your retirement is pivotal, you might even say critical – devising a plan that will ensure your retirement income will be sufficient enough to cover your day to day living in the non-working portion of your life deserves an appropriate amount of time and effort. Try and think of it this way – you could end up spending 30 or more years of your life in retirement, which is about as long as most people spend on planning for it.

It goes without saying that planning for your retirement is pivotal, you might even say critical – devising a plan that will ensure your retirement income will be sufficient enough to cover your day to day living in the non-working portion of your life deserves an appropriate amount of time and effort. Try and think of it this way – you could end up spending 30 or more years of your life in retirement, which is about as long as most people spend on planning for it.

Due to outside factors that you have no control over, such as inflation, declining employer based pensions and benefits, and lower market returns your retirement is potentially at risk. Combine the unknown, uncontrollable elements like those mentioned with the fact that you are likely going to live longer than prior generations and you can easily see how even the most well laid plans for retirement can be in placed in jeopardy. Preparing successfully for retirement means finding a balance between growth and income, planning accordingly regarding inflation and planning to have enough income should you outlive the averages. You will very likely need more money than you think you will.

Unless you don’t mind the prospect of working part time when you’re in your 70s, you need to plan efficiently and accordingly. The current generation will simply not enjoy the social security and employer pensions that secured our grandparents retirement plans. Pensions have declined rapidly over the past two decades to the point of non-existence for most people; this has shifted the responsibility of retirement from the employer to the employee. Comfortable retirement requires equal parts smart saving and investing *and* planning.

The first major step in smart planning is to determine how much you will actually require.

Studies have indicated that the average person will require between 80 – 90% of their current income in order to maintain their current standard of living. Going by this information, a conservative estimate would be that you will need to plan for an annual income very similar to the one you are making right now. The next step would be to figure out a feasible withdrawal rate. The withdrawal rate is the essentially the percentage of your retirement savings that you will need to withdraw for each year of your retirement. Studies have indicated that future retirees will have their best chance of maintaining their assets if the annual withdrawal rate of their retirement savings is around 6% annually. This information can in turn be used to make some quick calculations – you can get a very quick estimate for your required retirement savings amount by dividing your current annual income by the rate of withdrawal (*based on the above mentioned 6%).

Example:

If your target for annual retirement income is 60,000$/year, then you will be required to save 1,000,000$ based on $60,000 divided by 0.06%. This can be extrapolated easily: 55,000$ would require 916,666$, 50,000$ would require 833,333$, etc.

Now, understand that the formula and calculations shown above are not precise, rather, they are estimates. There are more relevant factors that you would typically need to consider such as your current age, expected retirement age, current earnings, accumulated savings (to date), potential income sources during retirement phase, investment portfolio and associated performance of investments, retirement expenditures/cash outflows, and of course – inflation.

Let’s look a bit closer and examine on a month to month basis – how much you’d need to save each month in order to meet the example above of 1,000,000$ for retirement. Assuming your investment rate of return on your savings is 8% (*which can of course not be guaranteed), then in order to meet the one million dollar mark by age 65, if you began saving at age 40, you’d have to save 1051.50$ per month for 25 years. if you have 30 years to retirement, the monthly savings figure is adjusted to a lower number of 670$/month, if you’ve got 35 years to retirement then the figure is 435.75$/month. The numbers can be adjusted in the other direction just as easily; if you’ve only got 10 years until retirement you’d need to start putting away 5466.99/month. As you can see, the earlier you start, the easier it will be to ensure you’ll reach your intended goal.

Planning your retirement is really a lifelong process. During your earning years your retirement planning is likely to undergo various changes and/or adjustments due to outside factors (such as inflation). These changes are necessary and should be viewed as opportunities to fine tune and readjust your plan in order to maintain efficiency and reach your goals.

The earlier you start planning and plotting your retirement income, the less you will be required to do later when retirement is closer. The key, of course, is to save as much as possible, invest wisely and make adjustments as needed or when more advantageous circumstances are at your disposal.

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