Guest Author - Reshma Vyas
How much do I need in order to retire? This is a question that invariably many individuals are asking themselves and/or their financial advisor. One does not need to be a mega multi-millionaire in order to retire; there clearly is no predetermined number that can be assigned to everyone. Whether or not you are adequately prepared for retirement depends on a thorough assessment and review of your lifestyle, both current and projected in retirement, personal objectives and financial assets.
1. Examine your lifestyle and expenses. Do you anticipate that your standard of living and overall expenses will be lower in retirement? Generally speaking, an effective rule is to plan on generating at least a minimum of 70% of your current income in retirement and up to a maximum of 92%. For example, if you are earning $55,000 a year, 70% of your income in retirement would be $38,500. It is crucial not to underestimate your debt obligations and living expenses. Quite a few retirees and those approaching retirement think that somehow their expenses will decrease. This is not necessarily the case since out-of-pocket health care expenses, utility bills, transportation costs, insurance and the general increase in the rate of inflation as well as unforeseen circumstances can make a measurable impact on their savings. The state of your health is another consideration. Do you have specific health issues that require special care?
2. It’s never too early to start charting your “blueprint” for your life in retirement. Think about how you want to spend your retirement. Establishing and maintaining a “retirement” journal is wonderful idea as it will help you formulate concrete plans for your life in retirement. Do you plan to work part-time and participate in volunteer activities? Is travel going to consume most of your free time? Knowing how you want to spend your retirement years and how much it will cost to fund your activities and hobbies will be a far more accurate gauge of your financial “preparedness” than anything else at this stage.
3. An adequate cash cushion. Do you have adequate cash savings in the form of bank savings accounts, certificates of deposits and/or money market accounts that can provide a source of income for you during declines in the stock market? Unfortunately, a significant portion of soon-to-be retirees overestimate the value of their 401(k) or other retirement accounts and very often neglect contributing to cash emergency funds and savings accounts. During times of economic uncertainty accompanied by prolonged bear markets and/or wide stock market fluctuations retirement accounts can swing rapidly from high to low valuations. Accumulating a large cash cushion can help a retiree withstand the financial blows from the stock market.
4. Review your income sources from Social Security, employer pensions as well as personal investments. How successfully are you meeting the challenge of generating at least 70% of your current income for retirement? Don’t rule out working part-time during retirement. It is interesting to note that a growing number of workers approaching retirement point out that they plan on working part-time. This is a social trend that is most likely to continue for the foreseeable future.
5. Relocation: Relocation is never an easy decision and has become even more complex in light of rapidly escalating social and economic pressures. The economic costs of relocation, particularly in terms of housing, taxes, transportation and health care as well as lifestyle issues all have to be factored when making a decision.
6. Life expectancy after retirement. Decades, ago, retirement planning was fairly simple. Most workers retired in their 60s and lived only for a decade, or possibly two. However, life expectancy has greatly increased. That trend combined with the fact that seniors are living far more active and healthy lives has resulted in the growth of retirement planning as an industry that has become a multi-billion dollar business. On the average, most people who retire at 62 can count on needing income from pensions and personal investments for at least another 25 or 30 years.