Tougher than ever, but it can be done!
If you’re retired, nearing retirement, or even just dreaming about retirement, then the concept of
“income” should never be too far from your mind. These days, very few people can afford to
retire the way they want to on their savings alone. You need a consistent stream of income in
order to meet expenses, reach your goals, and not outlive your money. Social Security helps, but
it’s usually not enough. So what’s a person to do?
Fortunately, generating income after retirement is possible. By educating yourself on some basic
techniques and strategies, and by starting now, you can retire (and stay retired) when and how
you want to.
While no advisor or company has a monopoly on good ideas, let me suggest to you that a professional opinion is always a good idea. So, in what ways can our Trademarked KeepMore process help you?
- How to properly convert your assets to income—this is critical if you want to do more than just meet expenses.
- When to take Social Security benefits—one choice with some very big consequences.
- Which types of investments are designed with income in mind—and how to tell which may be right for you
- And more!
We believe people should spend more time enjoying retirement and less time worrying about how
to pay for it. There are a lot of factors to consider when it comes to retiring successfully. But there are two, in particular, that should be near the top of every list:
INCOME & EXPENESES
Why are these two so important? To put it bluntly, it all comes down to this simple rule. You cannot retire successfully unless your income is more than your expenses. It sounds like a no- brainer, and it is. Yet, the number of people we meet have no idea what their income will be after their retirement, never mind if it will be more than their expenses. These people want to retire, they hope to retire, but they don’t know if they really can.
Of course there’s more to retiring successfully than just being able to pay the bills. Retirement is all about finally having the time and opportunity to try new things, go new places, and learn new skills. Here again is why income is so important. All those things cost money. So how do you know what you can do after retirement if you don’t know whether you’ll have the money to do it?
This is what you need to do. First, sit down and calculate what your income & expenses are now. Here are some questions you need to anwer:
- What is your monthly income after taxes?
- How much do you pay in monthly utilities?
- How much debt do you have, and what are your monthly payments like? Remember this can include mortgage payments, car payments, credit card payments, etc.
- How much do you spend on automobile insurance, home insurance, gas and other regular expenses? Don’t forget to consider any out-of-pocket medical costs.
Step 1: Once you’ve tallied those numbers, subtract your expenses from your income. Whatever number remains is what you have to save for retirement.
Now determine what expenses might change after retirement. For example:
- What expenses will you have to pay out-of-pocket that currently come out of your paycheck? An example is health insurance. If you receive health insurance from your employer, your expenses for this could go up after you stop working.
- What expenses do you currently have that will decrease after retirement? For instance, if you stop commuting to work on a daily basis, your transportation expenses will probably go down.
- What is your current tax bracket? Will it change after you retire and start earning less income?
Next comes one of the most important & hardest questions to answer.
- What will your health care expenses be after retirement?
No one knows what their future health will be like, but some research suggests that a 65 year old couple who retired in 2012 will ultimately end up paying $240,000 in health care costs. (1) The study cited assumes that the husband will live 17 years and the wife 20, and have no employer-provided health care coverage. That equates to paying a little more than $14,000 a year over 17 years, and $12,000 a year over 20. Of course, those figures could increase if you have any existing health conditions, like diabetes. But whatever your number is, how much hof it will you have to pay out of pocket? That’s an important question to consider too, because you may not have the same coverage you did while you were working. Another study suggests that most pre-retirees “severely overestimate the percentage of health care costs covered by Medicare.” (1)
Now comes the home stretch. Finish these final steps:
Step 2: Take your existing expenses, and then add the amount of expenses that will go up after retirement. Next, subtract the amount of expenses that will go down. Hold on to that number for a moment.
Step 3: Calculate the amount of income you expect to receive from any retirement accounts you have, like your 401K, IRA/Roth IRA, etc. Then, subtract the tax you’ll owe on these accounts once you start using them. Any withdrawals you make from the accounts that were funded with pre-tax dollars, like a regular IRA, will be taxed as income.
Take the final number from Step 3 and combine it with the amount you can save from Step 1. Then compare it to the number from Step 2. Steps 1 & 3 combined is your income after retirement. Step 2 is your expenses. Which number is higher?
Keep in mind every number you reach from this exercise is just a loose estimate, too loose, in fact, to make financial decisions by. At the very least, this should get you thinking. The good news is that if you’d like a much more concrete projection of your income and expenses after retirement, all you have to do is call Pyle Financial Services. In the meantime, just remember this fundamental truth: you cannot retire successfully unless your income is more than your expenses. Remember, too, that your income should be enough to cover your wants as well as your needs. So start thinking about it today. It’s a complex topic, but you’ve got plenty of time if you start working on it now.
(1) Source: Paul Sullivan, “Planning For Retirement? Don’t Forget Health Care Costs,” NY Times, October 5, 2012. http://www.nytimes.com/2012/10/06/your-money/planning-for-retirement-dont-forget-health-care-costs.html?pagewanted=all&_r=0