Money Management

Two Methods to Figure Out Your Retirement Income Needs

By  Opher Ganel

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Personally, I probably spend way too much time projecting our income and expenses for the years between now and retirement, tweaking our plan, and working on our retirement budget.

If you saw my massive Excel workbook, your eyes would probably glaze over (my wife certainly does ?).

Having said that, there’s that well-known quote often attributed to Ben Franklin, “Failing to plan is like planning to fail.

How Much Will You Need in Retirement?

The first step for your retirement plan (since retirement failure is not an option) is figuring out how much you’ll need in retirement.

Conventional wisdom is that you should expect to spend around 80% of your current spending (give or take 5-10%). However, as is often the case with one-size-fits-all advice, it fits most people rather poorly.

Your best bet to get a plausibly accurate number is to build a retirement budget like I did, using the following steps:

  1. Start from your current spending levels in each budget category.
  2. Remove those that won’t be there in retirement (think contributions to your IRA or 401k, child-raising costs, business and/or work-related expenses, commuting costs, life insurance, etc.).
  3. Reduce those that will likely go down (e.g., car expenses due to driving less, health insurance once you’re eligible for Medicare, etc.).
  4. Increase those that will likely go up (travel, gifts to grand-kids, hobbies, charity, medical expenses not covered by Medicare, etc.).

Worried you can’t forecast accurately?

Don’t worry, you can’t. As Nobel-laureate physicist Nils Bohr quipped, “It’s hard to make accurate predictions, especially about the future.

The point isn’t to get it perfect. Just make it good enough to put you on a reasonably good trajectory.

Another Approach – Budget A La Carte

The Wall Street Journal (WSJ) put together a nifty tool that helps to budget for your retirement.

However, it’s not perfect, so I came up with fixes for those shortcomings.

If you’re like the sane majority of people who don’t love budgeting, the WSJ tool can guide you through the process with minimal pain. Using my tips, you can then improve the accuracy of the resulting budget.

Potential Retirement-Budget Busters and How to Prepare for Them

There are several big-ticket items that many people forget to address in their retirement planning that could derail your plan.

  • Healthcare costs can eat up over $200,000 for the average 65-year-old.
  • Property taxes can grow a lot, especially if your neighborhood undergoes gentrification.
  • Home maintenance costs increase as both you and your home age – your home needs more work, and you can do less of it yourself.
  • The good news about retirement is that you have lots of leisure time to do what you enjoy doing, whether that’s travel, fine dining, shows, etc. The bad news is, you have lots of leisure time to fill with potentially expensive things such as travel, fine dining, shows, etc.
  • Depending on where you live in retirement, taxes can be much higher than you’d expect.

Make sure to research these so your retirement budget addresses them properly. Then, add a margin of 10-20% above what you come up with to cover the unexpected.

The Bottom Line

Retirement planning is crucial, and the first step is to know what income you’ll need in retirement. The above gives you two methods to budget for your retirement, including under-appreciated big-ticket items that risk your retirement success.

The best way to prepare for these is to educate yourself about them and implement solid mitigation strategies. Here are 7 risks to your retirement plan and what to do about them, and 3 ways to shock-proof your retirement plan.

If you still have questions, consider hiring a financial advisor who specializes in helping people who are nearing retirement. You might specifically want to consider working with an advisor who has earned their Retirement Income Certified Professional (RICP) designation as these individuals have specialized knowledge to help ensure you don’t outlive your retirement savings.


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About the Author

Opher Ganel

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.

Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

Disclaimer: In order to make Wealthtender free for our readers, we earn money from advertisers including financial professionals who pay to be featured on our platform. This creates a natural conflict of interest when we favor promotion of our clients over other professionals not featured on Wealthtender. Learn how we operate with integrity to earn your trust.

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