Every day, people ask me what the average retirement income is. When they ask this question, I get scared. Very scared. Why? Because it’s the wrong question to ask and the wrong focus to have.
I believe that people ask this question so they can compare themselves to that average (currently about $30,000 a year). If they have (or will have) more than the average retirement income, they feel great. If they have less, they feel bad. Neither reaction is appropriate.
The average income for retired people today is irrelevant. What matters is how much will it cost you to retire during the years that you plan to be retired, and can you afford it? Those are the only important questions when you think about retirement planning.
Let me share with you a few statistics that really scared the heck out of me. This illustrates how unclear many folks are when they think about their financial future. I recently read in Financial Planning magazine that 83% of those nearing retirement are confident that they and their spouse agree on how to spend their retirement savings. But 56% had no clue as to how much income they would have in retirement. Many people spend more time trying to calculate fuel economy than they do trying to calculate their financial future. Do you see how absurd that is?
They’re confident about how to spend money, but they don’t know how much money they’ll need to retire. How could you be confident that you’ll spend your money on a trip to France if you aren’t sure how you’re going to pay for it? What am I missing? Has reasoning taken a vacation?
OK. So let’s get back to the main point. How do you avoid this average retirement income crisis?
I’ve boiled it down to five steps:
1. Stop worrying about post retirement average income. It’s meaningless to you.
2. Focus on knowing how much it costs you to live now and how much it will cost you to live when you retire.
3. Estimate what your retirement income will be and make sure you have the proper investments to create the most retirement income possible.
5. Be flexible. If you won’t have the income you’ll need, you can either work a bit longer (or part-time), cut back on your spending now and in the future, or a combination of both.
Before I saw this statistic about people being overly confident about their retirement, I thought people were just frightened. Now I realize that half the people out there just don’t know and don’t bother to find out what they’ll need in the future. Don’t be one of them.
If you have a spouse or partner, sit him down and explain how serious this is. Make sure you both hammer out a plan for the future and know exactly how you’re going to pay for it.
So, here’s your homework assignment for the weekend: Ask your spouse to explain how the two of you are going to afford to retire. If he doesn’t know, ask him what he wants to do about it.
Have you done your planning? Did your spouse go along with you, or was it a struggle to get him/her to join the process?
Ready for some extra credit? Check out these important posts:
Tom from Canadian Finance Blog gets the Pilgrim Pick of the Pack Award for his enthusiasm and work ethic. This gentleman just put together a new blog called Money Index. He lists the top financial blogs (of course the Pilgrim is there…) and provides a convenient place to get all your personal finance updates. Tom NEVER sleeps and you can tell by this smooth-looking site. Check it out. You’ll thank me later.
- Yorkshire’s Thriftiest Granny by Miss Thrifty. Can you top Granny’s frugality?
- 10 Ways to Lower Your Cost of Living by my buddy Craig. (Nice list of action steps you can start implementing today.)
- What to Consider before You Cancel Your Credit Cards. An excellent and thoughtful post. I’m a big fan of getting rid of the plastic, but the Silicon Valley Blogger is making me reconsider.
- Can You Start an Internet Business with No Money Down? The Smarter Wallet has some awesome ideas. I’m in love with everyone (just about) who starts their own business. I just think it’s a great exploration and opportunity. Check out this post for some smart ideas on how to get started if you are low on cabbage.
- Deliver Away Debt opines on earning one million dollars.
- Lenny shares his wisdom on how to teach kids to be personal finance losers. A must-read.
- If you wonder why you are broke, wonder no more. Green Panda Tree House explains it all.
- What are your rights and benefits as a shareholder? MH4C spells it out.
- Kelly provides some practical advice on saving money on Halloween. (My fave is to turn out all the lights and pretend I’m not home!)
- Want to be a sharp-dressed Pilgrim for less? Tom drops some wisdom on building an inexpensive office wardrobe.
- Joe Taxpayer writes about the joys of filing multiple W-2s.
- Mike explains Form ADV Part II – the secret lives of financial advisors.
- The Financial Blogger lets it all hang out in his Future Shop rant.
- Monevator provides some tips for the index investor and how she can avoid financial hazards.
- Seeing as how it’s the Jewish Holidays, I thought it only right to include one of my best buddies, Bob from Christian Personal Finance. He always has lots of wisdom to share and you won’t be disappointed this week. Here’s a way to buy cheap cell phones online.
- One of the guys who took me under his wing and other than him being an incredible guy, I can’t understand why he did it. Jason at Frugal Dad shares his radical thoughts on our culture of debt. Jason is an amazing writer. I strongly encourage you to read this post.
- If you subscribe to any other blog, make it Debt Free Adventure. Matt Jabs is a person of incredible skill and ability, integrity and intelligence. Here’s a taste as he talks about the options we always have.
- Man vs. Debt – one of the most original guys on the web. He’s come out with a cool new e-book which I’ll be writing about shortly. If you can’t wait, check out “Sell Your Crap – Turn Your Clutter Into Cash.”
- Festival of Frugality
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