Ever pondered the optimal way to retire? While there are diverse paths to reach your goal, certain crucial steps must be taken before embarking on this journey. Today, we’ll discuss the second step: find what you need.
Is 70-80% of your current income sufficient for a comfortable retirement? While it’s a common rule of thumb in the financial services realm, it may not be as straightforward as it seems.
Consider this scenario: if you and your spouse currently earn a combined $350,000 in the final years of your careers, adhering to the 70-80% guideline implies living on around $260,000 per year in retirement before taxes.
Essential Components for a Secure Retirement:
- Basic living expenses:
- Housing: Mortgage or rent payments, property taxes, homeowners or renters insurance.
- Utilities: Electricity, water, gas, internet, and phone bills.
- Food: Grocery bills and dining out.
- Healthcare costs:
- Health insurance premiums, deductibles, and co-payments.
- Prescription medications and over-the-counter health supplies.
- Long-term care insurance or costs.
- Transportation:
- Car expenses: Fuel, maintenance, insurance, and registration.
- Public transportation costs.
- Insurance:
- Health insurance beyond what Medicare covers.
- Life insurance premiums.
- Taxes:
- Income taxes on retirement account withdrawals and other income.
- Property taxes.
- Potential capital gains taxes.
- Debts:
- Any outstanding debts or loans.
- Credit card payments.
Last week, we encouraged you to assess what you have. This week, we recommend determining what you need. Start by estimating the above costs and arriving at a final number. How does this compare to 70-80% of your current total pre-tax income?
Once you have that figure, assess whether what you have (from last week) aligns with what you need (this week). If so, congratulations; you’re in a favorable position. If not, you’ll need to calculate the required rate of return, annual contributions, and other factors to meet your financial goals.
Don’t overlook the impact of inflation on these numbers. Your personal cost of living increase is often underestimated but is a crucial factor in your retirement planning.
CONCLUSION
- Essential Components: Identify and plan for basic living expenses, healthcare costs, transportation, insurance, taxes, debts, and inflation as essential components for a secure retirement.
- Assessment and Alignment: Evaluate your current financial standing (what you have) and compare it to your retirement needs (what you need). Aligning these figures ensures a more favorable retirement position.
- Inflation Consideration: Don’t underestimate the impact of inflation on your retirement planning. Incorporating your personal cost of living increase is crucial for accurate financial projections and long-term security.
Don’t forget to return next week where we’ll discuss more about finding where you are in this process. This will include a real case study and implementation of how we analyze a couple’s retirement situation.
Contact Us
Jordan McFarland
jordan@chapwoodinvestments.com
Disclosure:
Chapwood Investments, LLC is a SEC Registered Investment Advisory Firm. No mention of a particular security, index, derivative or other instruments in this material constitutes an opinion on suitability of any security. The information and data in this material were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. At any given time, principals at Chapwood Investments, LLC may or may not have a financial interest in any or all of the securities or instruments discussed in this material. The guests appearing in material do not receive compensation or provide endorsements or testimonials. Past performance is not indicative of any future results.