How much income will you need during retirement?

When you think of your life in retirement you imagine yourself traveling the world, spending quality time with family and friends, pursuing simple pleasures, and living the life of ease and luxury.


With the children gone and various bills paid, it’s easy to assume that you’ll have sufficient income coming in to maintain your desired standard of living during retirement.

The lifestyle of the majority of senior citizens is anything but a life of ease and luxury. After 30 years of working hard, raising a family, and trying to maintain a quality standard of living, the thing that’s always procrastinated and often neglected is retirement planning. Creating your desired retirement lifestyle is going to take more than wishful thinking and groundless assumptions. It’s going to take proactive planning and purposeful execution.

It’s easy to envision your desired retirement lifestyle—no work, peace, freedom and fun. Have you ever answered the question how much income will you need to maintain that life­style? In this column, I’ll show you how to determine how much income you’ll need to maintain your desired standard of living during retirement.

Using today’s dollars, how much income do you think you’ll need each month to cover your monthly household expenses? Let’s say that you need $3,000 to pay for your monthly household expenses. I’m sure that you want to have money left over after you pay the bills. How much extra do you need to do fun stuff: take annual vacations, spend on impulse, etc.? Let’s say you’d like an extra $500 remaining after the bills are paid. Using our example, you need a total of $3,500 per month.

How much will Social Security provide? Although Social Security is on the brink of insolvency, I believe that Social Security will continue to supplement our income during retirement. However, the longer you have before retirement, the more likely your projected benefits will be reduced. Continuing with our example, if Social Security is projecting a monthly benefit of $1,200, I encourage you to discount it by 25 percent. As a result, using $1,200 as our projected monthly benefit, we’ll estimate Social Security to provide about $900 per month.

Company sponsored pension plans are on the brink of extension. Does your company offer a pension? Many companies have done away with traditional, guaranteed pension check per month plans. They’ve opted to use defined contribution type plans such as 401(k) plans where you’re required to contribute. Future benefit is based on your contribution, employer’s matching contribution and investment performance. If your company offers a traditional pension check per month plan, considering the fact many employers are freezing pension plans, I encourage you to discount projected benefit by 25 percent. In my example, we’ll assume that we will not receive a pension.

Did you or will you purchase a deferred or immediate annuity? If you purchased an annuity, calculate what your expected monthly benefit will be. Will you receive royalty checks or rental income during retirement? In our example, we’ll assume that there’s no money coming in from an annuity, rental income or royalties.

Do you plan to sell your home and use the proceeds from the sale of your home to supplement your income? Do you plan to tap into your equity with a reverse mortgage? We’ll assume that you plan to remain in your home, age in place, and avoid the high cost equity depleting reverse mortgage.

In our example we established that our target income during retirement is $3,500 per month. We expect Social Security to provide $900 per month. We do not expect to receive income during retirement from any other sources. As a result, we have a retirement income deficit (RID) of $2,600 per month. We’ll have to reconcile this deficit with income we generate from personal savings. As an alternative, we can lower our expectation and our standard of living during retirement.

As we pinpoint how much of a nest egg (retirement savings) we need to grow by the time we retire that will initially generate $2,600 per month after taxes, we need to take into consideration inflation and ensure that we don’t outlive our savings. You build a retirement nest egg by diligent, sound investing over an extended period of time.

Identify your risk tolerance for investing. Are you conservative, moderate or aggressive? If you’re conservative, your withdrawal rate will be 3 percent. If you’re moderate, your withdrawal rate will be 4 percent. If you’re aggressive, your withdrawal rate will be 5 percent. In our example, we’ll assume that our risk tolerance is moderate.

Multiply your monthly retirement income deficit by 12 months to calculate the annual income needed initially during retirement. $2,600 (RID) times 12 months equal $31,200. Divide the annual income by .80 ($31,200 divided .80 = $39,000). This figure represents the gross amount you’ll need annually to net $31,000 per year or $2,600 per month after taxes. Divide the gross amount ($39,000) you’ll need initially during retirement by .04 (moderate risk tolerance) to determine the size of the nest egg we’ll need to accumulate. In our example, we’ll need a nest egg of $975,000 to generate a monthly income of $2,600 after taxes. My calculation ensures that you don’t outlive your savings and that you leave a legacy to your heirs.

Chances are you’ve already established a retirement savings. This money will continue to grow over time. Depending on how good of a job you’ve done investing your money and that you avoid early withdrawals from your retirement savings, you may be well on your way to amassing $975,000. Assuming the current value of your retirement savings is $50,000, you have 20 years before you retire, and your average rate of return is 10 percent. Your current $50,000 savings will grow to $336,375 over 20 years. We’ll need to save an additional $638,625 between now and the day we retire to meet our goal of $975,000.

(Mortgage and Money Coach Damon Carr is the owner of ACE Financial. Sign up for Damon’s FREE Online newsletter at Damon can be reached at 412-856-1183.)


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