3 Retirement Income Variables to Consider
At CNN/Money, their personal finance columnist, Walter Updegrave, fields a question from someone wondering if he has enough saved for retirement. The specifics of the question and the answer aren’t of particular interest, but Updegrave did write several things I agree with and want to emphasize.
In the letter, the writer says he wants a specific amount of income ($125,000 per year) in retirement, which happens to be his current income. He writes that he has an investment property and has saved a considerable amount already. He also states that he saves $30,000 per year after tax in addition to his 401(k).
Updegrave points out a couple of important points:
- He correctly points out that $125,000 today will not have the same buying power 10 years hence. Inflation is something people often forget when and if they bother to calculate how much they need for retirement.
- When considering how much income you need in retirement, it’s important to note how much you save for that goal now. That is, if you save $15,500 (the 2007 maximum) in your 401(k) and $4,000 in a Roth IRA (also the maximum for 2007), you’re really currently living on your salary minus almost $20,000. For example, if you are making $90,000 and saving like this, you’re really living on more like $70,000.
I’d add one more:
- What you need in retirement is largely dependent on your health. I’d wager that, for most people, their expected standard of living in retirement probably isn’t much different than what it is today. The big unknown, though, is just how healthy (or unhealthy) they’ll be at retirement. With health care costs climbing much faster than inflation every year, I believe this is the key factor in retirement income planning.
When I look at our retirement ‘number’ I try to look at each of these three things - inflation, actual current income, and expected health. Then, I just do the best I can to plan accurately. The plan will be wrong, but I believe the planning process is worthwhile.
retirement
November 21st, 2007 at 9:31 am
Health is definitely a big variable in retirement planning especially when you factor in high health care costs and increasing life spans.
What is becoming another important consideration during retirement is willingness and sometimes need to work. What you do (travel the world, part-time job, volunteer work …) and what expenses your lifestyle incurs will have a big impact on your golden years.
November 21st, 2007 at 12:01 pm
Health is definitely an important factor. My Dada didn’t need much in retirement. He even earned some money doing work for people because being idle made him sad (and my Grana was dead, so traveling lost its appeal). But then he got senile dementia and everything changed.
Fortunately, he got his investments out of the stock market shortly before the crash but had enough time to make the best of the 90s. It’s good he had the money because he needed more and more care each month for the last 3-4 years before he died. I don’t know precisely what it cost, but it was well over half a million.
November 21st, 2007 at 1:32 pm
@ Mrs. Micah - I’m sorry to hear about that. Health is a tough issue and very unpredictable.
November 21st, 2007 at 10:51 pm
Don’t forget that 15.5K is pretax. So, it’s likely that the difference in real income isn’t as impacted as much.
November 21st, 2007 at 10:52 pm
Don’t forget that 15.5K is pretax, so the impact on income is actually less than that amount, but up to a third.
November 22nd, 2007 at 5:49 pm
You are absolutely right about health costs, it can be the huge surprise expense for many people when they retire. However I also don’t personally care for the traditional retirement suggestion that you should require some fraction of your current income. I expect my spending to be higher in retirement. I don’t want my retirement to be spent sitting around but instead to travel regularly and enjoy things without having to think about every penny. Traveling can be costly, including airfare you can count on spending around $10,000 per week for a nice but not overly luxurious trip. I am targeting to have a passive income in retirement of around $400,000 (in current dollars) per year largely for that reason. I spend a lot less than that now but that’s because right now I work 90% of the year. When you retire you have a lot more time to spend money.
December 6th, 2007 at 9:00 am
[…] 3 Retirement Income Variables to Consider @ Advanced Personal Finance […]