Retirement Planning





Denali (aka Mt. McKinley), Alaska

How to determine the amount of money you will need for your retirement:

Notice in the previous sentence I use the terms "you" and "your"?  Unless you pay a financial advisor or consultant to figure your budget out for you, you will be the one that must do it.  Even if you never plan to retire, you will still need to make adjustments to your spending when you start receiving your Social Security monthly allotment and any other retirement fund Required Minimum Distributions (RMD), pension, or annuity payments.

As a reminder, the term "retirement" means to cease from all working.  For the context of this article, the term is further specified to mean to cease from earning income wages through labor. 

There are different definitions of when people retire, including the following:

1.  People who choose never to retire - the "work until I drop" people.

2.  People who are forced to retire early due to situation or disability.

3.  People who choose to retire "early".  Further defined as people who stop earning wages before the year they qualify for Social Security benefits.

4.  People who work until the year they qualify for Social Security benefits then cease all labor that generates income wages.

You may have noticed that retirement is not dependent on your qualification to receive Social Security benefits.  That may be a mindset that some readers have ingrained.

Let's talk about budgets. 

In order for you to determine how much money you will need each year in your retirement, you will NEED a budget as a guide.  Remember that the budget is a tool that you set up to help you track your incoming and outgoing money.  Normally budgets are set for smaller time frames like weekly or monthly.

No one seems to like to talk about their financial budgets, if they use them, and if they are aligned each month not to exceed them.  The budget you have now will be the main tool you will use when you start the math to determine how much you need in retirement.  The easiest way to do this is to look at your current pay.  If you are currently living within your budget, look at your paycheck stub.  What I want you to focus on is not your gross total (before taxes) but rather, your net total (actual take home pay). 

When you are no longer receiving a paycheck, you are also no longer paying taxes or contributing to your retirement fund.  Your actual take home pay is the effectual amount of money you are living off.  Now just take that amount and multiply by your number of paychecks you receive each year.

Example: you take home $350 each week.  There are 52 weeks in a year, so your annual take home pay = $18,200.  Now, no one knows how long we will live and need the money, so a standard guide says to use 25 years.  If you retire at age 65, add 25 = 90 years old.  So you need to save enough money to allow for those 25 years.  Now, if you multiply $18,200 by 25 years, you will need $455,000 in income during retirement.  Sounds like a whole lot of money, doesn't it?

A note to consider:  many of the financial industry "experts" recommend that we have plan to spend at least 70% of our annual income earnings (your annual earnings right before your retirement) to use as a guide.  I have run this number through my mind dozens of time, but cannot figure out why those "experts" think we would need that much if we follow the simple rules during our retirement planning.  Those rules are further explained in the last section of this topic (It is time to retire, now what?).

So now, using the above example with the $18,200 annual income, 70% of that is $12,740.  So $12,740 multiplied by 25 years is now $318,500.  Still sounds like too much to build?  Some of that may come from your Social Security benefits as long as you qualify.  This example also does not take into consideration any increase in pay, or the increase in cost of living due to inflation. 


                        Meteor Crater, Arizona

How to build and monitor your nest egg for your retirement:

Before you actually leave the employer payroll, or sell your small business, you need to be stashing as much money as possible into your retirement accounts (401k, IRA, etc).  I read yet another article complaining about the one out of four Americans who have less than $1,000 in savings or retirement funds.  The main obstacles reported this time were: trouble managing their day to day living costs and too much money used for high debt payments.

Now, only you can determine how much you can stash each month.  The past couple of years, most large employers who offer a 401k retirement plan have changed their tactics.  Now, they can automatically direct a percentage of your payroll to your retirement plan, unless you choose to opt-out.  This strategy will help those people who fear the unknown reduction to their take home pay.  It also helps lazy or procrastinating type people to fund their plans. 

If you are one of those fear people as described above, I will suggest one thing for you to try: most employers match a certain amount of the employee contribution, so your contribution automatically earns you a profit.  If you are afraid of the unknown reduction to your take home pay, either call your human services or payroll representative and ask them to run the number for you, or you can start slowly by increasing the payroll deduction by only 1% each month.  The second option also allows you time to adjust your budget to allow for a slightly lower monthly income.

If you are planning to retire "early" or before you are eligible for Social Security benefits, you need to consider how much non-retirement cash you need to have in savings or investments that will produce an income stream for you to live on before you tap your retirement funds.  The longer you go before tapping those funds, the more time they have to build (or recover from economic downturn).  Non-retirement cash is the money you have in your wallet, your savings account, certificates of deposit, savings bonds, and any investment accounts that are not funding an Individual Retirement Account (IRA).

At least four times a year you should review your 401k investments and tweak them to help make them grow faster.  To do this, you will look at the plan website and find the history of each fund option.  I like to use a ten year history as normal economic downturns recover after five to ten years - according to the history of the stock market.

Using the previous example of how to determine your annual actual take home pay, you can determine how many years you can live off your cash before tapping your retirement funds.  The previous example provided an annual net income of $18,200.  So you need to add up all of your various cash and investments to determine how many year you can survive without a paycheck or retirement check.

Something else to consider here, if you have a mortgage, you will pay it off at some point (hopefully) and this will reduce your monthly budget requirement.


                                            Inside Bridal Veil Falls, Arkansas

It is time to retire, now what?

When you are within three to five years of actually retiring, you need to make some financial changes to your growing portfolio.

1.  If you still have more than one employer sponsored retirement fund, you should consolidate them now.  Consolidation will involve choosing your account that has the best annual return and investment options and rolling all the other funds over to it.  This will make life much easier for you as you age.  Managing several accounts will get burdensome as we age.  If you do not want to keep your retirement funds in an employer sponsored account, you can also roll your funds into a new IRA managed by either your broker, or managed by you or a family member. 

If you choose to roll your funds, remember that there are restrictions on the type of fund the money was originally invested in (pre-tax, post-tax, Roth) and the type of fund the money is being rolled into.  There are also IRS restrictions regarding how often you can roll your money around.  My understanding is that these restrictions were enacted to help prevent fraudulent behavior by Financial Consultants who were recommending their clients roll IRA money frequently. 

The Financial Consultant earns commissions each time the money is rolled.  Fiduciary (making decisions that benefit the client first) rules are currently being reviewed to also help prevent fraud or self-centered decisions by the Consultants.

2.  If you still have debt, pay it off before you stop working.  This will ensure your monthly budget is manageable, especially if you expect your new monthly budget will be reduced when you stop working.


3.  Buy and pay for a new car if the one you have is more than four years old.  Having a good and reliable car when you retire is essential as you most likely will replace your daily commute to the office with more pleasure based travel.  You want to have the new car paid for before you stop earning wages for the same reasons as item number 2 above.

4.  Make a plan to keep active and busy.  If you do not already have a membership ship at a local gym, then start one.  Join your local senior center too.  You will need to keep up social interactions, which have shown to help keep mental and physical well being from degrading.  It also helps to keep moderate exercise in your schedule to keep you healthy, but also to help you maintain your weight.  You may have noticed, the older we get - the more difficult it is to lose weight.

5.  Create a weekly schedule.  The single, most complained problem noted by the retirees I spoke to is:  we lose track of time.  They no longer have to report to work each day at a designated time.  They lose track of which day it is, and if they have an appointment to go to, or dinner date, or birthday party to attend.  Use a calendar to remind you of all appointments or social events.  That calendar can be a traditional paper based tool, or an electronic one on your mobile device.