that are as important or even more important. You need to have a firm grasp of these items as well.
Deciding When to Retire
Retiring sounds so appealing when you’ve had a frustrating stretch at a job you’re not particularly enjoying. But some folks really enjoy working and aren’t eager to have wide-open daily schedules day after day, week after week. Deciding when to retire and what to do in retirement is an intensely personal decision. For sure, there are many financial and personal considerations and questions, and we begin addressing them in this chapter.
Even when you’re healthy, the job market may not be. Your employer could suffer financial hardship and reduce its workforce. Or maybe you’ll be lucky enough to retire early (even though it’s unplanned) because your employer offers you a buy-out package that’s too good to turn down. Or worse, you may lose your job with little notice and few benefits.
Ideally, when caught in one of these situations you would obtain another job and continue it until your planned retirement age. Unfortunately, events may not unfold that way. The economy, the job market, and your age can work against you. Finding another job, at a compensation level you’re willing to work for, may not be possible.
Even when you leave a full-time career voluntarily, you may plan to work part time for a few years. Or you may assume that if the first years of retirement are more expensive than planned, you can return to work at least part time. Yet a part-time job you assumed would be easy to find may not be available at all or may be available at a much lower level of pay than you expected.
WHAT FOCUS GROUPS SAY ABOUT PLANNING FOR RETIREMENT
The Society of Actuaries conducted some interesting focus groups with folks early in their retirement years. They honed in on people who had investment portfolios of at least $100,000 and who needed that money along with their Social Security and pension benefits to meet their retirement expenses.
Most of these people didn’t consult advisors and plan all that much for their retirement. Instead, they were more concerned with quitting work by a particular age. A number of focus group participants commented that their retirement decision came down to a “feeling” that they could swing it. Consider these comments from three different retirees:
“I thought you were supposed to retire when you are about 65, and thought I would try it.”
“I never sat down and thought, ‘I am 59, and in 30 years I’ll be 89. Have I allocated enough for 30 years?’ I never did that. Theoretically, I should have.”
“We take it day by day. I can’t worry about what is going to happen tomorrow.”
The focus groups also found that retirees were spending more than they expected on entertainment and travel, prescription drugs, and gas. It also wasn’t unusual for retirees to overlook inflation. And finally, although retirees were concerned about the potential for high medical and long-term care expenses, they did little planning around those expected expenses.
The lesson to be learned from all this is that you must have realistic expectations and proper assumptions when planning for your retirement. For more about managing your expenses in retirement, see Chapter 6.
Knowing How Much You Really Need for Retirement
Most people have a long-term financial goal of retiring someday. For some, doing so means leaving paid work behind entirely. To others, simply cutting back on work or doing something completely different on a part-time basis is most appealing.
If you don’t plan to work well into your golden years, you need a reasonable amount of savings/investments, which includes monthly Social Security benefits, in order to maintain a particular lifestyle in the absence of your normal employment income. (If you do plan on working some during retirement, check out Chapter 18 for some helpful hints.) The following sections help you get started on determining how much money you need and coming to grips with those numbers.
Figuring out what portion of income you need
If you’re like most people, you need less money to live on in retirement than during your working years. That’s because in retirement most people don’t need to save any of their income and many of their work-related expenses (commuting, work clothes, and such) go away or greatly decrease. With less income, most retirees find they pay less in taxes, too.
So what portion of your income do you really need as you make your retirement plan? The answer isn’t simple. Everyone’s situation is unique, so examine your current expenditures and consider how they may change in the years ahead. (Check out Chapter 6 for more information on budgeting and managing your expenses in retirement.)
To help figure out how much money you need, keep the following statistics in mind. Studies have shown that retirees typically spend 65 to 80 percent of their pre-retirement income during their retirement years. Folks at the lower end of this range typically
Save a large portion of their annual earnings during their working years
Don’t have a mortgage or any other debt in retirement
Are higher-income earners who don’t anticipate leading a lifestyle in retirement that’s reflective of their current high income
Those who spend at the higher end of the range tend to have the following characteristics:
Save little or none of their annual earnings before retirement
Still have a significant mortgage or growing rent to pay in retirement
Need nearly all current income to meet their current lifestyle
Have expensive hobbies that they have more time to pursue
Grasping what the numbers mean
When determining how much money you need for your retirement plans, you want to think in terms of your goals and how much you should save per month to reach your desired goal given your current situation.
In Eric’s previous work as a personal financial planner and lecturer, he came across many folks who had done some basic number crunching or had consulted a financial advisor. Far too often, these folks got a number — a big, bad number like $3.8 million — stuck
