Where should you begin your retirement planning? With so many pieces of the puzzle to sort and organize, and so much at stake, what starting point makes the most sense? Our advice is to start here: begin by determining your three numbers.
1.) How much does your lifestyle cost?
We believe you begin with the end in mind. Imagine you have retired and the paychecks have stopped. Before you can determine how you will replace those paychecks, you will need to get real clear about how much you spend each month. So many soon-to-be and recent retirees tell us “I just want to maintain my lifestyle,”; therefore, it’s crucial to have a solid grasp of how much money you routinely spend right now so that you can have a realistic estimate of what you will need in the future.
Our budget sheets can be used to carefully account for both current expenses and what is expected to be spent in retirement. Going line by line and being thoughtful and thorough is a better exercise than estimating, say, 80% of your current salary. Make sure you are considering how your lifestyle may change; for example, commuting costs may go away but travel or dining expenses may increase. Remember to factor in Healthcare Expenses. Try to paint the most realistic picture possible.
2.) How will that income need to grow?
It isn’t as simple as coming up with your income number above and using that number year after year for the length of your retirement! Whatever your income need is on day one of your retirement, you will need to have a plan in place to double and maybe even triple that number.
Protecting your purchasing power—the ability to maintain your lifestyle on Day 1 of your retirement as well as twenty to thirty years in the future, should be your top priority. Many retirees have not adequately planned for growing their income in order to keep pace with inflation. And we can understand why! During your working years, it is easy to miss the creep upward of your daily expenses, because while items get more expensive to purchase year after year, most people are also likely making more money year after year. The pain, therefore, isn’t as apparent. Talk to anyone who has been retired for five years or more, however, and they have a different perspective! You should get clear on how your income will need to grow over the course of two to three decades! If you fail to plan for inflation, your purchasing power by the end of your retirement may be cut in half!
Oftentimes we hear prospective clients say "As I get older, I will be doing less, therefore my income needs will decrease." "That's fair", We say. "However, have you considered that although you may be spending less on your lifestyle expenses, your health care costs may be increasing?" It may not come as a surprise that health care costs increase at a rate higher than normal inflation.
3.) What is the number you will need before Taxes
The fairly new reality for the Baby Boomer generation and the generations that follow is that for most, the bulk of their accumulated wealth resides inside of a pre-tax retirement account such as an IRA, 401(K), 403(b), etc. Pre-tax meaning it has never been taxed and has been growing tax deferred ever since. Therefore, the government has been waiting for their share of this money for decades! What this means is that if you need to spend $1,000 from your IRA, you may have to withdraw somewhere in the range of $1,200 to $1,300 in order to account for taxes due. Proper planning for your income will need to account for knowing what that “before tax” or gross number looks like on a monthly or annual basis. In order to ascertain this, you will need to begin thinking about :
- What tax bracket you may be in during your retirement years, and
- How much of your income will be coming from which income streams, e.g., Social Security, Pre-tax accounts, after tax accounts, Roth accounts, etc.
Retirement often appears as a finish line in our minds; we strive hard to cross the tape and deservedly raise our arms in victory. Our advice is not to cross that line until you have developed a comprehensive income plan with a firm understanding of these three numbers. For more information, Contact us today!