Retirement Income Planning Requires Realistic Spending Assumptions
You may recall the commercials with people walking around with their "number" for retirement savings on their shoulders or seen the "follow the green line" ads. Or you likely have read articles on retirement planning or have received advice from a financial professional in which you were presented with the 70% rule; the rule that suggests that retirees will need between 70% - 80% of their pre-retirement income in order to maintain their standard of living. There are several flaws with this formula, the least of which is that it doesn’t consider your actual income and expenses at the time of retirement.
Retirement income planning needs to be grounded in today’s realities and it must anticipate the costs associated with aging, not just the cost of inflation. It also must be based on the practical expectation that you will only be able to save as much as you are able to sacrifice while you are working. More planners are applying the concept of “consumption smoothing” that combines an attitude about current spending and lifestyle needs with a vision of the same in retirement.
The concept seeks to “smooth” out your consumption over your working and retirement years so there is less of a discernible drop in your standard of living. Essentially, it is a part of the retirement planning process that is designed to gradually prepare for the transition by moderating spending over time, and increasing savings proportionately. Certainly, life events, such as children leaving the nest, or eliminating the mortgage, will typically allow for adjustments in consumption; but, the process is helped, and even accelerated, when additional consumption smoothing is applied through a moderation of lifestyle.
What You Can Do Now to Prepare for a Financially Sound Retirement
Set Realistic and Achievable Goals
Whether you envision a “life transition” retirement, or you’re intent on making age 65 (or any other age) your target for a traditional retirement, you will need to map out a complete strategy that includes paying off debt, stepping up savings, and probably assuming some risks. The plan will need to be tight, with frequent benchmarks that allow you to track your progress and make necessary adjustments along the way. It is important to use realistic assumptions in your planning, such as an achievable rate of return on your money and a challenging inflation rate. A qualified financial planner should assist you, in order to ensure that your strategy is realistic and your tracking is accurate.
Track Your Spending Now
It is vitally important to know your specific income requirements to determine whether your available capital will meet your needs over your lifetime. If you aren’t already, you should be tracking your spending now, so you will have enough time to adjust it as you approach retirement. With the advent of easy-to-use software budgeting tools, such as Mint.com (free online) and Quicken, there is no excuse for not knowing where every dollar is going or how to manage your cash flow with better results.
The initial setup for these programs can be somewhat involved because you will be inputting all of the information about your existing accounts, creating a budget, and setting goals. But, once you’re up and running, you will be able to manage your finances like a pro in typically less than five minutes a day. Because some of the programs work in concert with your online bank and credit card accounts, your cash flow data can be automatically providing you with a real-time snap shot of your finances. Mundane personal finance tasks such as bill paying and account reconciliation can be automated, and tax preparation can be far easier. You will want to make sure that you have up to date security measures on your computer and modem before utilizing these programs; you may want to speak with a computer specialist, if you are unsure.
Start Living like a Retiree
For many people, out of necessity, their new vision of retirement includes living in downsized homes, driving less expensive or fewer cars, entertaining less, and vacationing closer to home or at home. People are beginning to focus on “quality of life” as opposed to “lifestyle” when envisioning retirement. You can still have an excellent quality of life with a tempered lifestyle; why not make that a focus now? Why not begin making the transition to retirement while you’re still in your peak earning years? By downsizing your home and other lifestyle choices, you’ll not only increase your cash flow for savings and debt reduction, you’ll find the transition into actual retirement to be much smoother.
Regardless of your planning method or process, it would be a mistake to succumb to standard formulas or a generalized approach to retirement planning. Right now, your retirement vision, formed by your own needs, wants, attitudes and beliefs, rests in your mind, and it will undoubtedly change as your outlook and priorities change, but you should always base your income needs on realistic assumptions.
It is always a good idea to consult with a qualified financial planner to determine your personal realistic spending assumptions. This type of consultation is ideal for a fee-only hourly rate or project fee planner such as those in the Garrett Planning Network of financial planners. Safe Harbor Financial Advisors, LLC is a member of the Garrett Network and serves clients in the Northern Virginia and greater Washington, DC areas. Learn more about the Garrett Network at www.GarrettPlanningNetwork.com and about Safe Harbor at www.SafeHarborFinancialAdvisors.com or by calling us at 703*829-SAFE (7233).
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.
