I think the most difficult part in planning for retirement is estimating your future expenses. What will be the effect of inflation? What lifestyle changes might happen? Will expenses constantly rise or will there be some leveling off or even reductions? Will you totally lose some expenses, but pick up new ones? Also, someone who is 1 year away from retirement will likely have a better idea of their expenses than someone who is 20+ years away. Even predicting expenses 5 years out can be very difficult.
So, when I started on my retirement plan, I had no idea what I needed so I threw out the $1 million number as what I needed to supplement my other retirement resources, pension and Social Security. At that time, Social Security was just a thought and not included in the numbers. Early retirement was not part of the plan. At about age 50, I refined some of the numbers and my supplemental number dropped to $650K in the IRA and retirement age was set at 62. The $650K number required aggressive investing that would have to continue several years into retirement, a very risky plan.
Fast forward to just recently, I further refined the numbers and now include a Social Security benefit. I now figure retirement age can be 60, which is where my retirement benefits kick in, including medical. The only question is what size the IRA needs to be to meet our expenses?
I’ve found future expenses to be hard to estimate and probably next to impossible for someone 20-30 years away from retirement. Being about 6 years away does make it easier, but there can be a big range to the numbers. For example, I’ve estimated that my retirement expenses can range anywhere from a low of $45,000 to a high of $114,000 in today’s dollars. The low end assumes we pay off the mortgages and the high end assumes a house upgrade with a bigger mortgage and associated costs. I’m guessing our actual retirement expenses will be somewhere in the lower half of that range.
If we retire according to plans, our pensions will cover the low end of the range and will have some inflation protection. Unfortunately, we won’t be in a position to payoff the mortgages at retirement. I figure that will take 3 years after retirement in order to manage taxes. Social Security will further reduce our supplemental income needs, but the earliest that can kick in is two years after retirement.
Based on the above numbers, my supplemental income needs would require a portfolio ranging from $0 to $400,000 depending on where our actual retirement expenses end up. That range is significantly less that where I thought I needed to be at retirement. In fact, I may already have enough saved since my IRA falls in that range. One thing about knowing this information is that your risk profile does change. I at least am more leery about investing in higher risk asset classes and am taking action by moving towards stability.
It still comes down to how accurate you predict your future expenses. So, for those who are retired, how close were you in predicting your retirement expenses? For those within 1-2 years of retirement, how confident are you with your projections? All I can say is that I’m confident We’ll fall in the above range, but that range is too big to give me much comfort.
So, when I started on my retirement plan, I had no idea what I needed so I threw out the $1 million number as what I needed to supplement my other retirement resources, pension and Social Security. At that time, Social Security was just a thought and not included in the numbers. Early retirement was not part of the plan. At about age 50, I refined some of the numbers and my supplemental number dropped to $650K in the IRA and retirement age was set at 62. The $650K number required aggressive investing that would have to continue several years into retirement, a very risky plan.
Fast forward to just recently, I further refined the numbers and now include a Social Security benefit. I now figure retirement age can be 60, which is where my retirement benefits kick in, including medical. The only question is what size the IRA needs to be to meet our expenses?
I’ve found future expenses to be hard to estimate and probably next to impossible for someone 20-30 years away from retirement. Being about 6 years away does make it easier, but there can be a big range to the numbers. For example, I’ve estimated that my retirement expenses can range anywhere from a low of $45,000 to a high of $114,000 in today’s dollars. The low end assumes we pay off the mortgages and the high end assumes a house upgrade with a bigger mortgage and associated costs. I’m guessing our actual retirement expenses will be somewhere in the lower half of that range.
If we retire according to plans, our pensions will cover the low end of the range and will have some inflation protection. Unfortunately, we won’t be in a position to payoff the mortgages at retirement. I figure that will take 3 years after retirement in order to manage taxes. Social Security will further reduce our supplemental income needs, but the earliest that can kick in is two years after retirement.
Based on the above numbers, my supplemental income needs would require a portfolio ranging from $0 to $400,000 depending on where our actual retirement expenses end up. That range is significantly less that where I thought I needed to be at retirement. In fact, I may already have enough saved since my IRA falls in that range. One thing about knowing this information is that your risk profile does change. I at least am more leery about investing in higher risk asset classes and am taking action by moving towards stability.
It still comes down to how accurate you predict your future expenses. So, for those who are retired, how close were you in predicting your retirement expenses? For those within 1-2 years of retirement, how confident are you with your projections? All I can say is that I’m confident We’ll fall in the above range, but that range is too big to give me much comfort.