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To live comfortably after you retire, you have to be realistic
about how much you'll need to pay the bills.
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Good health is wonderful. So is a nice place to live. But what you
really need when you retire is money — money to pay your bills, and enough
left over to do the things you want. The general rule of thumb is this: You'll probably
need 70% to 85% of what you're spending before you retire, more if you have expensive
hobbies or plan to travel extensively. For example, if your gross income while you're
working is $6,000 a month — that's $72,000 a year — you'll need roughly
$4,800 a month, or about $57,600 a year, after you retire.
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UP OR DOWN?You can be pretty sure
some of your living expenses will shrink after you retire, but others are equally
certain to go up. Planning your financial future includes anticipating those changes.
WHAT COSTS LESS
- By the time you retire, you'll probably have paid off your
mortgage.
- Based on the number of children you have and how old they
are, you'll be able to predict when you'll be finished paying for their educations.
- If you commuted to work, you'll probably spend less on day-to-day
travel and restaurant meals. You may need only one car, and will probably spend
less on clothes and make fewer visits to the dry cleaner.
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WHAT COSTS MORE
- Home maintenance costs and property taxes tend to go up,
not down, over time, unless you move to a smaller place or to a state with lower
taxes.
- If you're home all the time, your utility bills may increase.
- Home and car insurance are apt to increase.
- Medical expenses, including the cost of insurance, often
increase significantly over preretirement costs. These costs will continue to rise
as employers cut back on healthcare coverage in general, and for retirees in particular.
The cost of prescription drugs is partially covered under Part D of Social Security
for an added premium, but may continue to be a substantial expense for many people.
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INFLATION'S BITE Inflation
is another factor you have to consider when planning your retirement budget. If
you were retiring this June, for example, you'd need 80% of what you were spending
in May. But next June you'd need more money to pay for the same goods and services.
That's because of inflation, the gradual increase in the cost of living. Inflation
has averaged 3% in the US since 1926. It has sometimes been substantially higher
though, hitting 13.5% in 1980 and averaging 5.3% through the '80s.
That means if you're planning on a 20-year retirement, you may need more than double
the income in the 20th year than you do in the first, just to stay even. How can
you manage that, especially if you're not working anymore? The surest way is by
earning money on your investments, at a rate that tops the rate of inflation.
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DOING THE MATHWhile
it might take a long time to estimate your retirement needs if you were doing the
math yourself, you can use one of the software programs often called retirement
planning calculators available on financial services and educational websites or
on CD-ROMs.
Some of these programs, and a number of the websites, have been developed primarily
to provide an independent planning resource. Others are sponsored by financial institutions,
including insurance companies, banks, and brokerage firms, that offer planning that
incorporates an introduction to their own products and services.
These calculators are generally easy to use. All you have to do is plug in the financial
information they ask for, along with details about your plans for the future. They
will figure out how much more you'll need to invest to have enough money to retire.
If a financial professional does the analysis for you, you may pay a fee for their
advice about how you might invest or rebalance the investments you have or a sales
commission on the products you purchase, or both.
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