retirement income

Millions of women approaching retirement age have nothing saved up and depend on Social Security alone. Other women are worried of what will happen to them because they will retire with a small balance in their retirement account.

If you are a reader of this blog, it means you take preparing for retirement seriously and want to learn more on the topic.

When I think about planning for retirement I think about it like assembling the financial pieces of the puzzle. It takes time before everything fit into the right places and you can see the whole picture.

The important part of this process is to calculate your retirement income and expenses and see if you have a gap between them.

Why identifying an income gap is important?

When you retire, you can no longer count on a paycheck from work. You will start relying on a fixed income, such as Social Security or pension. But the income from these sources may not be enough to cover all your regular expenses.

That will leave you with the gap between income and expenses. In this situation, you will depend on money from your savings and retirement accounts to cover the expenses.

Let’s find out how much is your income gap in 5 easy steps.

Step 1. Review your current financial situation

You need to see where you are right now and what do you have. Take an inventory of all your financial assets.

Start by collecting all your financial information:

• How much is the current value of your house?
• How much do you have in your retirement accounts, 401(k), IRA, Roth IRA?
• How much do you have in your investment accounts?
• How much is the current value of your rental property or vacation house (if you have one)?
• How much is the value of your collectibles, gold coins, if you have any?

If you want to know the current value of your house, use Zillow for an approximate estimate.

Recently we refinanced our mortgage and it came with an appraisal report. I use this estimate as the approximate value of our house. You can ask the local real estate broker to give you the most current evaluation of your home, your rental property or a beach house if you have any.

Put all this information in the Excel spreadsheet or just use a piece of paper and call it Financial Assets Category.

Step 2. Estimate your retirement income

The next step will be to find out how much is your combined retirement income.

The income in retirement will come from different sources.

For many people, a Social Security paycheck will be THE ONLY income in retirement.

Other people will have an additional income coming from savings, retirement accounts, annuities, rental properties and/or dividends.

The more sources of retirement income you have the better off you are in your golden years.

Collect all this information and add to your Excel or paper spreadsheet under the Retirement Income Category.

Most of the information you have already collected while taking inventory of your financial assets. You just need to add the amount of your Social Security benefits.

Use the link to the Social Security Administration for information.

Related Post: What is the source of your income in retirement?

Step 3. Estimate your retirement expenses

There are many ways to estimate expenses in retirement.

A simple way to estimate your retirement expenses is to know where and how you spend your money today while you are still working.

Grab all your bank and credit card statements, your bills and any other financial information you have and calculate the total. This total number shows your monthly expenses today. The hard part of estimating retirement expenses is to predict how it will change in 10 or 15 years.

A common rule of thumb to use is that you will need about 70 to 80% of your current spending.

Here is a simple calculation.

If your current spending is $5,000, in retirement it will be approximately $3,500 to $4,000.

But if you are planning to maintain the same lifestyle as today, or splurge on a lot of travel trips or have expensive hobbies, your retirement expenses will be $5,000 or even higher.

Related Post: Why predicting retirement expenses is important?

Step 4. Calculate the balance between income and expenses

Finally, you collected all the information and have the full financial picture in front of you:

• Inventory of all your assets
• Your retirement income
• Your calculated expenses

The next step will be to calculate the balance between your income and expenses.

Did you find out that you have an income gap in your future budget? If yes, how do you cover it?

Here is a simple example.

You are planning to spend in retirement $5,000 a month ($60,000 a year).

Your guaranteed income from Social Security and/or pension is $4,000 a month ($48,000 a year).

$5,000 – $4,000 = $1,000

Based on the calculations you have an income gap of $1,000 a month ($12,000 a year)

Step 5. A few ways to cover a retirement income gap

How do you cover the retirement income gap?

• Reduce your spending in retirement
• Plan to work longer, so you can save more
• Delay to collect Social Security to increase the future pay
• Withdraw money from savings and retirement accounts

Even you are planning on working longer, to save more and delay Social Security might be still not enough to eliminate the gap completely.

According to statistics the average retired worker will receive around $1,360 per month. And the average retired couple will receive $2,260 per month. These numbers are adjusted with every year and not to the higher end.

The idea of working longer, saving and investing more becomes important when we look at the statistics. For many of us, the Social Security check will cover some of the basic retirement expenses.

However, if we want to maintain our current lifestyle or dreaming about active and fun years in retirement, we need to know how we will cover the gap between income and expenses.

How much money to withdraw from retirement accounts?

You have built a good size nest egg to live off it in retirement. After you retire and stop receiving the paycheck from your employer, you will start spending your retirement savings to cover the expenses. You need to be careful about how to withdraw money from your retirement savings.

The popular rule of thumb is 4 percent or “safe withdrawal rate”.

Its recommended by many financial planners and advisers. There are many debates between financial professionals if 4 percent is safe enough. Some of them recommend to reduce it to 3 or 3.5 percent. The main idea is you should be able to withdraw 4 percent of your portfolio value without ever depleting it to a dangerous level.

In what order to withdraw money?

When you retire, you get to decide how much to take from your savings and retirement accounts and in what order. The order in which you withdraw money from your accounts can impact how long your portfolio lasts in retirement.

In general, you should withdraw money in this order:

• First – from taxable investment accounts
• Second – from tax-deferred accounts – 401(k), IRA
• Last – from tax-free accounts – Roth IRA

The reason behind this order is how much you must pay in taxes. Taxes will likely be one of your largest expenses in retirement. You will have more control over taxes, if you will be smart about withdrawal strategies.

The longer you can keep money in your tax-deferred and tax-free accounts, the better. It means that more money stays in your accounts and grow over time.

Everything will change once you reach 70 ½. At this age you must start taking money from your tax-deferred accounts based on IRS rule.

The rule is called a required minimum distributions (RMD) and it cannot be ignored, otherwise, you will get penalized.

So, if you are 70 ½ years old the order of money withdrawals will change:

• First – withdraw your required minimum distribution (RMDs) from a combined balance in retirement accounts
• Second – if you still have an income gap, pull money from taxable investment accounts
• Third – if you deplete the taxable accounts, go back to your tax-deferred accounts
• Last – pull money from tax-free accounts

Final thoughts

You’re in good shape, if you can stretch your financial assets to create enough income to cover basic expenses in retirement. But if not, you’ll need to find additional ways to increase your income or reduce your spending.

Even if you think that you’re far away from retirement age, you might still consider some of the options above. The main reason we are saving money for retirement is so we can spend them when the time comes. To learn and prepare yourself and your finances for the future is better than to ignore it.

This post is only for educational purposes and serves as a guideline for the readers of this blog who wants to learn about retirement planning. Please don’t rely on it as a tax or investment advice.

Did you come up with the numbers for your retirement income and expenses? Do you have an income gap?

Have you started thinking about how to withdraw money from your savings and retirement accounts?

Please share your thoughts with us.

If you are a woman in your 50s or 60s do you know how much money will you need to enjoy your retirement?

Unfortunately, there is no simple answer to that question. We all have different wants and needs. Also we all have different ideas what our lives will be in retirement. But we still have to decide how much money we NEED to live the way we want in our golden years. Some people are planning to live on much less than they use it right now, but others may want to spend more.

Let’s take a look at the list of factors and see if it helps to come up with your personal estimates:

Your current age

The more time you have before your retirement age, the less money you’ll need to save each month to reach your nest egg goal. The closer you come to retirement age, the more money you need to put aside into your retirement savings.

When you’re in your 30s, you have plenty of time to save in 401(k) and build a good size nest egg. When you’re younger, you can invest in stocks and see them grow over time. You don’t need to worry when the market goes down, because your portfolio will have time to recover losses.

But when you turn 50, the time is not on your side anymore and you have less time to save for retirement.

When you’re older, you’ll have fewer years to recover your investments from the bad economy or market volatility. At this age, there is a risk, that if the market goes down you would lose the major part of your retirement savings.

If you’re in your 50s and you want to retire early at 62, you’ll need to have enough savings to cover your everyday expenses and the healthcare costs.

You can start collecting an early Social Security paycheck even it comes as a reduced one, but Medicare will begin only at age 65. Before that, you need to cover your own healthcare costs and it will come as a big expense.

Your desired retirement age

Many resources recommend baby boomers to put off their retirement age until 70. Based on the statistics we will be better off financially if we choose to work longer.

The reason behind this number is that we have more years in retirement than previous generations. It means we need to have more savings and a larger nest egg to cover our expenses.

If you are planning on taking early retirement at age 62, you might be spending 25 to 35 years in retirement. Do you have enough money saved for so many years? The big mistake will be to retire early with small financial funds. After all, you don’t want to start looking for a job in your 80s.

Are you planning to retire together with your spouse or partner?

What age does he want to retire?

Is it possible to retire together or you need to do it separately?

This decision will affect your lifestyle. When you start planning at what age to retire, it will be a good idea to share your thoughts and ideas with your spouse or partner.

How much will I spend in retirement?

Think about your lifestyle when you retire. What are you going to do? How are going to spend your days? Are you planning to live the same lifestyle or dreaming about something more extravagant?

If you’re planning to live the same lifestyle, your expenses will be close to what you have while you’re still working. But if you’re planning to spend more in your future life, then you’ll need to save more each month right now so you can spend more money later.

Why do we need to make all these calculations, predictions and estimations?

We want to figure out how much money is enough to live a comfortable lifestyle in retirement.

How much is enough?

There are 2 easy steps to come up with your own number:

Step 1. The ballpark number

Many retirement planning books and financial gurus recommend saving a minimum of $1 million in order to retire comfortably.

The more detailed statistics recommend having 70% to 80% of your pre-retirement income to cover expenses in retirement. If for example, your income is $100,000 today, you will need to have $70,000 to $80,000 a year to retire the way you want.

Then if we use the same 70% to 80% number and multiply by the number of years in retirement, we will come with a more thorough estimate.

$70,000 x 25 years = $1.75 million

$80,000 x 25 years = $2 million

Not everyone likes to look at the ballpark numbers and not feel scared. It looks too high. There are many women who don’t have even a fraction of it saved in their retirement funds.

The next way would be to find out how much is your current spending and then figure out how much you’ll need to save for retirement.

Step 2. The current spending number

Do you know how much you spend per month? Per year?

If you don’t know how much your current spending is, start tracking your expenses right now.

Keep track of everything you spend money on, no matter how small is the bill. You need to look at your day-to-day spending as well as at your regular expenses. At the end of the day, you want to see a big picture of where your money is going.

Take a piece of paper or create an Excel spreadsheet with all your spending categories. If you like to go digital, use a program app like Mint. It will automatically collect and categorize every credit card transaction. All you need to do is to assign things to proper categories.

Divide every expense into categories. At the end of the first month, look at your categories and see how much you spend on each:

• Mortgage/rent
• Utilities
• Transportation
• Insurance
• Groceries
• Clothes

After tracking your expenses for a while, you will know how much you spend each month. Then multiply that number by 12 to get a picture of how much money you spend per year.

Here is a simple example (all calculations after taxes):

• Current monthly expenses $5,000
• Current yearly expenses: $5,000 x 12 = $60,000

Future spending is between 70% to 80% of current spending:

• $60,000 x 0.70 = $42,000 per year ($3,500 per month)
• $60,000 x 0.80= $48,000 per year ($4,000 per month)

The calculations will help you to find out how much money you’ll need for expenses in retirement.

If you’re in your 50s and planning to retire early, you’ll need to have enough money saved for another 25 years.

$42,000 x 25 = $1.05 million

$48,000 x 25 = $1.2 million

But if you work longer and retire later, the amount of money you need to save for retirement is much less:

$42,000 x 20 = $840,000

$48,000 x 20 = $960,000

We should remember that after we stop working, we will spend much less money on transportation (no commute), office clothes, and lunches and dinners with colleagues. However, the healthcare expenses might grow with years.

We will spend more money on fun things like travel and hobbies.

But as with many things in life, how much money you need to save depends on your individual financial situation. If you’re able to cut your expenses, you can start saving more money for retirement. Or you can plan on working longer.

Income in retirement

When we retire, we’ll need some level of income to cover our expenses. Most of us will have income coming from at least one or hopefully several sources.

There are several sources of income in retirement:

• Social Security
• Pensions
• Part-time work
• Annuity
• Retirement savings
• Dividends and interests
• Rental income

Do you know how much is your Social Security benefits? If you don’t, it is a good time to look at your Social Security Statement.

Related Post: Social Security as a Retirement Income

Social Security, pension and annuity is considered a guaranteed income. The great thing about guaranteed income that it will keep coming in as long as we live.

Other sources of income are your personal retirement accounts and savings.

If you already have saved a decent amount of money in 401(k) or other retirement accounts like IRA, Roth IRA, you have a good head start on saving for retirement.

If you’re starting from scratch, you want to save as much as possible. Start with saving 10 % or better 20% of your income. Saving even 5% it is better than not saving at all.

Take a piece of paper and calculate all the sources of your retirement income in the spreadsheet as if they started now. Then go to Step 2 calculations and compare them with your expected retirement expenses from the spreadsheet.

If your retirement income is less than the expenses, then you’ll need to adjust your spending. You need to save more or work longer to cover the gap between.

But if your retirement income is greater than your expenses, you’re the lucky one and should start planning for early retirement.

Related Post: What Factors Will Affect Your Retirement Income?

Related Post: What Is the Source of Your Income in Retirement?

Putting it all together

How much do I need to have saved is the biggest question when preparing for retirement. There are so many kinds of answers from the financial advisers, books and blogs. The truth is nobody can predict the future.

If you want to retire in your 50 you will need to have a nest egg saved much bigger than if you want to retire in your 60. And if you’re waiting to retire at 70, your number will be even smaller.

So, it all depends on your age, your dreams and goals about your future life. Start looking at the numbers. Compare your financial situation based on different retirement age scenario. Find ways to improve your future retirement income and expenses numbers.

Do you know if you have saved enough for retirement? Do you feel prepared for retirement?