And you’re not saving for retirement(!)
My 6 line spreadsheet didn’t hold a candle to my financial advisor’s multi-tab monte-carlo-simulated analysis of where I was.
He could account for travel at the front of our retirement and medical expenses at the end of our retirement and modeled just when it was most efficient to start taking Social Security.
You’re going to (hopefully) retire once. A good financial advisor has seen thousands of people retire and probably has a perspective on some gotchas. (Ours knew how to handle the specifics with a State pension.)
Just a passerby, wondering why this is in GD instead of IMHO.
I can’t emphasize enough the need to account for inflation. I was lucky enough to retire, 10 years ago, with a pension equal to a little over half of my highest salary. That pension is now worth about 25% less than when I retired (although it helps that I’m paying the same mortgage amount now as then, except for insurance and taxes). I don’t know what a person can do about that, except not depend too much on a fixed income.
On the expenses line, I would include increased cost of upkeep for anyone who owns a home (because as you get older, there is less you can do for yourself, and things continue to break down). In fact, I wouldn’t count a home that you own as an asset, because you won’t get any benefit from it unless you sell it – and if you’re like us, rental costs have zoomed past our monthly mortgage, so selling it means using a large part of the equity just to keep a place to live. A home is an expense under any circumstances.
One other general point I would emphasize in any class about retirement planning, especially for young people: you can’t plan perfectly. There are just too many unpredictable elements. My advice to students would be to do the best you can, then put it aside and get on with your life. Pay attention to changes in laws that affect retirement; maybe tweak the plan every five years if things have gone differently than you expected.
Basing your needed retirement income based on income at middle age doesn’t always make sense. At age 45 you will have a mortgage, you may have student loans, and you will have money you have to spend on your children. You’ll be putting money into retirement accounts and your tax rates will be higher. By your 60s hopefully all those expenses will be gone and your tax rate will be lower.
There is also the fact that many people downsize in retirement. Moving from 3-5 bedroom houses down to 2 bedroom houses is not uncommon. Also some people leave HCOL areas and move to more MCOL and LCOL areas.
A couple that needs $15,000 a month in gross income living in a high cost of living city with 2 kids in college, money to put into retirement accounts and a mortgage may only need $4,000 a month in gross income to live in a paid off home in a medium cost of living area and kids who are independent.
Then you have the fact that the tax structure in retirement is different. You generally don’t pay FICA taxes when you’re elderly. Income from a post-tax IRA is tax free. Long term capital gains and qualified dividends aren’t taxed or they are taxed at 15% for most retirees. Your total tax rate (federal, state and local) may be 30% of gross income when you’re middle aged, it may only be 10-15% of gross income in retirement.
If you just want an easy answer, tell them this
“80% of your regular income is needed in retirement income. Invest early, invest consistently, and invest in index funds”
Yes. Even with no reforms, social security will remain solvent, it’ll just reduce benefits by ~20%. There have been repeated reforms to the tax rates and benefits to both social security and medicare in the past, it’ll probably happen in the future too.
I think it’s difficult to give a precise % of salary.
Here’s my situation:
- I own my house (so no rent)
- I have no debt (e.g. credit card paid off)
- I have an Individual savings account - Wikipedia worth thousands of pounds (which after several years is now tax-free)
- I have two private pensions (both (Defined benefit pension plan - Wikipedia), plus the UK State pension
I estimate that lot adds up about 60% of my salary (but I was well-paid as a teacher at a private school.
The place to start is the “three legged stool” metaphor which used to be a common way to talk about living in retirement.
Social Security + Pension + Individual Savings (the pension has been mostly replaced by a 401K or similar program)
Once they understand that Social Security - even if it is forever fully funded - is not designed to be a retiree’s sole support, they may be more ready to accept the rest of your course.
As for how much money they need, the most attainable number I’ve ever heard is 2/3 of your income at the time you retire. But the more important message they need to grasp is, retirement mean somewhat lower living expenses, but a huge drop in income. How do they prepare for it.
Until you can’t do them any more. I used to be pretty handy. I once did some pretty significant home renovations. Now I dare not risk getting up on a ladder. I dare not risk shoveling snow. I can’t mow the lawn, especially in hot weather, without risk of heat exhaustion. You have to account for the fact that you eventually have to pay either youngsters or professional services to do all this stuff for you. Life is cheaper in some ways in retirement (no need to buy fancy clothes, no need to commute, minimal wear & tear on the car) but more expensive in other ways.
I’m not sure why you are calculating Social Security benefits that way. Social security takes 35 years of earnings. If there are more, it takes the top 35 years. So while it is more complicated, it would be better to have them plot expected raises and then use that to calculate the benefit.
The way I did it was to analyze my spending before I retired, adjusted for things I would cut down on (gas for the commute) and things I might do more of, like travel. Someone mentioned the drop off in travel as you age, I can assure you that this is real. However they also need a reserve for repairs, new cars, etc.
One way of encouraging savings is to tell them about income generation from the retirement account, which goes on top of Social Security. The more they make every year from the investments the less they have to take out. I have more money now than when I retired 9 years ago, but not everyone is going to have such a cushion. It is more likely if you start early and don’t touch the retirement account. I suspect you tell them that already, but you can produce some alarming examples of what happens if you don’t.
The biggest thing I learned after I retired is that your situation depends less on the balance of your account and more on cash flow. If Social Security plus some of your investment income is greater than your expenses you can laugh at the market. It is a very different mind set from looking for growth investments before you retire.