Contributed by: Sandra Adams, CFP®
A big part of the planning work that we do is planning for future retirement. Simply put, how much income will you need each year to support the expenses you will have in retirement, and what income sources and assets will you have once you get there to support those needs throughout your lifetime.
For many clients, they have an accurate calculation of the income they will need. This is based on what expenses they have pre-retirement adjusted by the expenses that will go away (like mortgages, employment-related expenses, etc.), and those that may increase (like travel, those related to additional hobbies, etc.). For other clients, coming up with a future retirement income need is truly a wild guess. They may not have a good handle on what they spend now, and knowing what they need in retirement is even more of a mystery to them. So, where should you start to develop your correct retirement income figure?
First, we suggest tracking expenses before retirement to determine your average monthly spending. We suggest using a budget tracking tool to track spending for two or three months at least a couple of times, during different times of the year, to catch irregular expenses and trends. Once you feel that you have a good handle on your average income needed monthly, you can estimate your annual need. This method also helps you understand WHERE you are spending and where that might change once you retire. You can also develop an annual expense need estimate by backing into it. For example, start with your gross salary and subtract what you pay in taxes and save to 401k or other savings vehicles. You can generally assume what is left is going towards spending. However, this method will not tell you where you are spending and how it will change. Now, we at least have a number to start with for our planning projections.
Next, I often suggest that clients very close to retirement try living on their future retirement income BEFORE they retire to see if it feels comfortable. For instance, I have had clients live on just one of a couple’s salary to see if they could do it without feeling like they were denying themselves. Trying to live on the amount you are planning on living on in future retirement, even for a few months, gives you a taste of your future reality. If it feels comfortable, you likely have the correct number. However, if you feel like you are denying yourself and completely changing how you live, perhaps you need to go back to the drawing board and plan for a different income goal to see if that is possible. Not planning for the retirement you want from the beginning will only set you up for years of retirement planning. Why not see if the retirement you want is possible by starting with the right retirement income number?
When it comes to retirement income, you do not want to guess the number. It is worth your time and effort to come up with the most accurate number for you to meet your ideal retirement goals. Retirement planning projections are only as good as the assumptions we use. If we are not using the right assumptions, especially the right number for your retirement income, the projections for your retirement success will not be as accurate as you want them to be.
Work with your financial planner to find the tools you need to come up with YOUR most accurate retirement income need, and then make sure your plan can support those needs. We want you to have the most successful retirement possible!
Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Sandra D. Adams, CFP® and not necessarily those of Raymond James.