Seeking To Determine One’s Retirement Income Needs
There are a lot of retirement income calculators out there, with differing assumptions and results, and they generally rely on rules of thumb such as you will need 70% of your current income or so. Ideally though, one will assess one’s own particular needs and come up with a number of their own, and therefore this is a field that really needs to be variable.
It might be the case that 70% will not be enough, and in other cases, such as one relocating to a country that has a much lower cost of living, one may be able to get by on less than this.
When we’re looking to calculate this, we need to look at all the things we are spending money on how that we may be able to cut back on later. This usually is a fair bit of money for a lot of people since we tend to overspend.
Overspending here does not mean spending beyond your present income, although plenty of people do that, even though this cannot be sustained long term. The pleasure of owning things though often does lead people to develop spending habits that are not sustainable, and unlike countries, you can’t overspend long term or you will bankrupt yourself.
What overspending means in this context is things that you spend money on that you do not have to. This does not mean moving into a cardboard box, but it may mean cutting back on the things you spend on that is above and beyond what you would consider to be a reasonably comfortable way of life.
We then need to consider what may amount to additional expenses in your later years. For instance, you may need to spend more on health care insurance. The money for these expenses needs to come from somewhere, and we need to avoid neglecting them or else the number we come up with will be insufficient.
Separating the Wheat from the Chaff
This all is not as easy of a task as it may appear, and people will tend to include things that aren’t really necessary. It is always important to know the difference between a need and a nice to have, and many things which are nice to haves are seen as needs.
For instance, one may eat out a fair bit at restaurants, and this is clearly a nice to have for some people, but isn’t the most economical. This is the sort of thing that should be excluded when evaluating our needs, along with a whole lot of other things that people don’t really think about that much.
This is not to say that you can’t have such things, but only if you have the means to afford them, and we once again need to start with a number that will suffice. Then, and only then, can we look to build on that as we’re able to comfortably exceed this income need and expectation.
This is not a matter of what one has been accustomed to, and there are people who have been living rather lavishly due to their higher levels of income and may indeed be able to sustain a good portion of that into their retirement years.
This will enter into the calculation, but no matter how well off one may be living presently, unless they have enough money that they shouldn’t even worry about these things, we need to always start with the basics and build from there.
Why Focusing On Actual Needs Matter So Much
There are two components to projecting your retirement needs, which are the actual income level desired and the amount of time that this has to be maintained. Both of these factors need to be well accounted for.
The next step after calculating this level of income needed will be to look at what you have to do in order to be able to provide it, and the plan that emerges will usually involve drawing down the principal of your retirement savings to some degree.
If we’re fortunate enough to save enough such that we can reasonably expect that the principal won’t be needed, or buy a guaranteed income product such as an annuity, then the time factor will be taken out of the equation and we can then focus just on the income level being high enough.
Often times though, people will maintain fairly conservative investments whose yield is not sufficient to live on. This is often by design though, and the idea then becomes to draw down the principal of their savings at a certain rate, so that they can rely on their retirement savings supplementing their income over their entire expected lifetimes.
There are instances, when we have not saved up enough, where this won’t be sustainable, but the goal is to look to avoid this. The result will be that we will no longer be able to live comfortably enough when the money is gone, and that’s not a goal of anyone.
We therefore have to do our best to look to prevent this occurrence, and this is the biggest reason why the starting point, the income level we use, needs to be based upon actual needs, what it takes to meet what would be considered reasonably comfortable to live on.
The second part of this is to actually live the plan, and not spend beyond our means in retirement, when we don’t have the ability to sustain this, or the day that the money runs out may come.
Using The Numbers
Once we arrive at the amount of income we really need, and we have looked at how long we’ll need this for, and we’re able to sustain that with our plan, then and only then should we be looking at adjusting this up as we are able.
This is going to yield a certain total, with a common rule of thumb being looking to sustain that income over 30 years or so. If someone retires at 65, this would provide this level of income to age 95.
If one wants to build in even more comfort to this, one can add even more, 35 or even 40 years, even though it’s quite rare for people to reach age 100. Even so, some people are simply going to be happier knowing that they very likely won’t outlive their savings, and that can certainly be seen as a benefit.
Plenty of people won’t be able to achieve this minimal goal, but this makes it even more important to look to determine one’s actual needs when it comes to retirement income, so that one can at least sustain their needed lifestyle for a longer period of time.
Even though it is not wise to overspend in these circumstances, plenty of folks do so anyway, due to not taking enough stock of the overall picture, especially when it comes to what they actually do need to be comfortable.
Later, as the poorly designed plan plays out, the additional pleasure they gained by living in a less sustainable way will not be near enough to compensate for the additional years of hardship that their lack of proper planning led to.
So, the starting point really needs to be to first figure out what we need, and how long we will need it, and use that as a starting point. We may or may not be able to sustain this for our lifetime, but we owe it to ourselves to extend this level of comfortable retirement as long as we can.
This will require that we take a hard and honest look at what our necessary expenses may be, and while we may end up only having the means to live a less lavish life than we like, reality always should take precedence.