You can eliminate your fear of retirement income planning by taking some direct action – and I’m going to spell out exactly what those actions are. The good news is, you don’t have to be a financial professional to retire well.
But before I lay it out in detail, let me put a spotlight on a few formidable parties out there who are very interested in keeping us all stuck in our fear. They want you to ask yourselves over and over (and worry sick) over the question, “Can I retire now?”
1. Wall Street.
These folks almost depend on us having non-stop anxiety about our financial future. If we actually felt good about our finances, a hefty chunk of their “lifeline” of profits would disappear.
2. Book publishers.
They are guilty of the same charge. They sell us personal finance books and courses promising the (financial) moon and – in most cases – delivering little. Actually, it’s in their interest not to deliver the remedy. If they did, we wouldn’t need to buy more personal finance books.
I’m not saying that everyone involved in the financial services industry is a crook and that every personal finance book is junk. In fact, I’m in the personal finance industry and I’m also an author – double jeopardy! I am saying that both industries have a vested interest in keeping everyone mired in the problem and staying very focused on financial anxiety. Pain sells, baby.
And please don’t misunderstand. We do need to be clear about our own financial reality. But while Wall Street and Madison Avenue try to sell you on your financial anxiety, I simply think your financial future is a lot better than they try to convince you it is. So shut off the ads and commercials. Let’s hammer out a plan you can really use to have a worry-free financial future:
1. How much income will you need if you completely retire and generate no income from work?
The rule of thumb is that when you retire, you’ll spend 80% of what you currently spend. But that’s really not a useful estimate.
Look at your current expenses over the past year – go through the details. If you weren’t working, how would that change? Would you travel more? Would you live in a smaller home? Will your mortgage be paid off by then? Would your medical costs rise? Will you provide less support for others (like your kids)?
Estimate what your life would look like if you didn’t work at all and figure out what that would cost on an annual basis. Then figure out what that works out to on a monthly basis.
- Look through all your expenses over the last year and figure out which expenses would decrease and which would increase. You don’t have to be perfect – you can’t because you’re estimating what the future is going to look like. Just do your best and don’t sweat it.
- Figure out what your personal budget plan is now. (Hey, you want to stop Wall Street and Madison Avenue or not? Sure this is work…but the payoff is huge…stay with me.)
- Adjust your future estimate of your monthly living expenses based on what you learn by going through the first two steps. That’s how much will you be spending if you stop working completely and maintain the lifestyle you want.
- You should adjust this number for inflation. You can do so using a future value calculator.
The final number might be bigger than you thought.
And by now, you might be shaking your head. “Hey Neal…I thought you said I shouldn’t worry…but now I’m scared to death. I’m spending all this money every month now; I’m going to be spending as much (or even more) when I retire, and you’re telling me not to worry? What are you, a masochist?”
Not at all. You’re only on Step 1. We’ve got a few more steps to go. Patience, Pilgrim…patience.
2. What passive income sources will you have when you retire and do you have a deficit?
When you retire, will you have Social Security, Social Security spousal benefits and/or pensions? Let’s assume that you completed Step 1 and estimate that you’ll be spending $7,000 a month when you retire. Figure your Social Security is going to be $2,000 (you should get estimates for this every year). OK…your deficit is $5,000 a month.
- Contact Social Security and employers to get updated estimates of what your income will be in the future.
3. Estimate how much income your assets could generate when you retire.
There have been books written about withdrawal rates so I’m not going to try to tackle this issue in a post. But assume you can withdraw 4% of your savings and investments and spend that money. So, if you have (or will have when you retire) $300,000, you can assume that you’ll withdraw 4% of that $300,000 every year. That works out to $12,000 a year – or $1,000 a month. Now your total income (before taxes) is $3,000. That means you have a deficit of $4,000. OK…so that’s what we’ve got to work on.
- Make a list of all your financial assets. Are you sure you have the best income investments?
- Use future value calculators to estimate what they’ll be in the future.
- Multiply those numbers by 4% and divide by 12.
4. Get out the scissors.
Time to go over your itemized expenses again (Step 1) and do some cutting. It’s time to learn how to stop spending money poorly. What could you live without? Could you travel a little less? Could you cut out some of the dining out?
Don’t worry…I don’t expect you to cut $4,000 from your monthly spending in one fell swoop. That’s asking too much. But could you shave $1,000? What can you do to cut spending? And keep in mind that if you’re going to cut those expenses when you retire, why not do some cutting now?
After all, if you do that you’ll be doing yourself a few big favors:
First, you get your spending more in line with what you can really afford. Second, you take those current savings and add them to your investments. That increases the money that’s working for you now and growing. That in turn, will generate more income when you retire. Sweet…
- Go through all of your expenses from the last year.
- Make a list of all of the expenses you will cut in the future…and start cutting down now.
- Commit to another person that you’ll make these cuts and report back to that person periodically on how you’re doing.
Assume you still have a deficit. Let’s say that you were able to cut $1,000 from your monthly expenses. At this point, you are still $3,000 in the hole. What to do? Well…work is certainly an alternative. And not a bad one at that. There are many benefits to having a job (or even just a job you can work over the weekend) besides making money:
- When you are working – you have less time to spend money! Think about it. When do you spend most money – on the weekends or during the week? If you’re like most people I know, you spend more on the weekends. Well, when you’re retired, every day is a Saturday. Fill up some of those days with work (or volunteering) and you’ll save a bundle.
- You get to interact with more people.
- You’ll live longer. A number of studies prove that people who continue working after they “retire” are healthier than those who stop work completely.
- You’ll feel better about yourself because you’re being useful.
- You’ll get some exercise without having to go to the gym.
At the end of the day, what’s wrong with working after you retire? There’s no shame in it. I personally love what I do and I have no plans to ever stop – even when I can afford to.
Warren Buffet is still at it. What…I’m too good to put in an honest day’s work? Even if somebody becomes a greeter at Costco…who cares? What’s wrong with that? Nothing at all.
When all is said and done, you have four options:
1. Go back to Step 4 and cut additional expenses.
2. Create a larger pool of assets that are working for you now (by downsizing your residence, for example) to create more income in the future.
3. Work a little.
4. A combination of all three.
You can make a plan for your financial future, and you don’t have to spend the next 10, 20, 30 or more years worried about it like Wall Street and Madison Avenue want you to.
But there is one thing you have to do if you want these benefits.
You have to take action. This isn’t going to happen by itself.
What have you done now to plan for your future? Have those actions relieved your stress? Are you planning on working once you retire? Will it be in the same industry or something completely different?
Financial Samurai says
Daniel – Way to think big! I like the $6.5 million figure! But yeah, best to check the calculator 🙂
Thnx again for the article Neal. I like.
Benjamin Cope says
I love the picture of the cat on the door. =)
neal: thanks for your article. it somewhat alleviates my anxiety about retiring by confirming that i’m doing just about all i can do at this point for retirement. i plan to “retire” in 5 years; i’ll be just shy of 62. i’ll be getting a pretty good pension at that time, plus i can decide whether i’ll take social security at 62 or can afford to let it ride for awhile. i have no debt except for a mortgage and i will have a few more years left on that after retirement. so that mortgage balance may be the deciding factor as to whether to take social security sooner rather than later. i’m also thinking that i may trade my house for a condo, thereby eliminating the mortgage issue entirely, reducing it substantially or even making a profit and increasing my retirement fund. in the meantime, i continue to contribute to a deferred compensation plan through my employer, which has grown over the years to a considerable amount (even with last year’s hit)and will continue to grow over the next five. and i have other mutual funds. i will probably work at least part-time for awhile at something entirely different from what i do currently (i don’t want to have to think that much after retiring). your costco greeter reference may not be that far-fetched. i’ve joked about being a wal-mart greeter. and i’m looking forward to having alot more time for various volunteer activities that i currently dabble in. a couple of years ago when the thought of retirement actually became something tangible, and when i started crunching the numbers, i was afraid but decided that i just can’t worry about it. i can only do what i can do with what i have, and i think i’ve been doing it.
Also….as time goes on,….it will be easier and more likely that you’ll be able to sock more away.,..
Assuming a 3% increase per year, it’s close to $2 million. But I guess further education and dual incomes can make a big difference.
First you always assume you are going to be saving just $5,000. Business owners have the opportunity to save upwards of $45K (if their cash flow obviously allows for it).
Yah..so basically it’s going to be impossible to retire? How can anyone possibly save up enough? I was a 0 or two off..lol
Just read your site you seem to be 23 – so using the same inputs at 23 – and you contributed $5k EVERY year (not just the 9) you get to a number of $1.2 still way off the 6.5
While I LOVE your enthusiasm your numbers are WAYYYYYYYYYYYYYYYYYYYYYYYY off. Go check out the Calculator at Dinkytown.com
Annual contribution $5,000
Starting balance 0
Current age 30
Age of retirement 65
Years until retirement 35
Expected rate of return 7.00%
This equals just shy of $740,000 at age 65…no where near your projection of $6.5 Million. If you were wondering to get to your $6.5 Number – you need compounded results of 16% EVERY year.
Here’s my plan:
Save $5,000 in Roth IRAs each year for the next 9 years.
Watch that $60,000 (assuming 7% growth) grow into $6.5 million over the following 35 years. Why is my goal $6.5? Well, $1.25 million sounds like a good goal today, but in 44 years, $1.25 million may not sound like much. Based on the past 44 years, $1.25 million today will be worth a little over $8 million when I retire. After taxes, that’s more like $5.6 million.
44 years ago, someone with $188,000 felt the same way as someone today with $1.25 million!
That means that if you had $1.25 million in 44 years…you’d have only $188,000 in today’s dollars! Long term goals often forget this important aspect of the economy!
Financial Samurai says
Awesome Neal! Great layout! It’s almost like one of those “Choose Your Adventure” books where after each chapter, you have to choose A, B, or C to decide your fate 🙂
I like how you say “when you work, you have less time to spend money!” So true!
I think most folks OVER estimate how much they need when they retire though. B/c when they retire, they don’t have the mortgage, the kids tuition to pay for and all this other stuff. Medical bills rise, but that’s what insurance is for!
Evan….right. That’s why it’s so important that you show it to them man.
I have clients like that too… Just keep working….they’ll “get it”.
I have a link to a post I wrote recently. it’s not the end-all of budgeting but it’s a very simple, free system you can use. Let me know what you think.
I like clear cut approach. I often see clients that are spending north of $200K, but are currently “only” making $300K leaving very little for savings after Taxes. As such when I run a retirement calculation for them – it crashes within a year or two and they are shocked!
I think a lot of people — myself included — are simply afraid of what might happen down the road, so we just… don’t… think… about… it.
Granted, my retirement is about 30 years off, and a lot could change by then. (My two-year-old daughter will undoubtedly be making millions, for instance, and I’m sure she’ll be happy to share her good fortune.) That said, I appreciate your concrete advice here. As always, it’s very sound.
But your post also got me thinking about budgets. I imagine you advocate some sort of budgeting, but what kind? On another blog (not mine — this is no plug for my own site), there was a lot of talk about the “envelope system” of budgeting. (http://www.thedigeratilife.com/blog/personal-budgeting/)
I don’t mean to go off-topic here, but I’m wondering about your thoughts on monthly budgeting, which system you use, etc?