Do I really need a retirement plan?
Before starting this blog, I didn’t have a clear vision of what comes next when my husband and I retire. I didn’t know if there is enough money saved to live comfortably when we stop working. The whole idea of not working just never crossed my mind. Why would I do that?
I love my job and I love to have money coming in. In addition, I love to splurge from time to time on cruise vacations or tropical island’s resort. But with time I noticed that many of my friends, neighbors, and co-workers would retire, sell their houses and move to warmer states. There are discussions about traveling full time, spending more time with grandkids, or joy of golfing and fishing any time you want.
The world around me has changed, and I started to ask myself:
Can I afford to retire? How long do I need to work before retirement? Where would I live in retirement?
How to plan for retirement if the future is full of unknowns?
For most of us, retirement planning means estimating what the future is going to look like. Even if you are retired now, you still need to get a sense of what your retirement will cost down the road. You need to have some kind of road map. That means predicting a future that is full of unknowns.
- How long will you live?
- How much will it cost you to live longer?
- How much will be your health care expenses?
- When to start withdrawing money from the retirement accounts and in what order?
- What about inflation? How it will affect my cost of living?
For many of us, this is as far as it goes. Very often we stop thinking about it. If we cannot predict the future so why even bother. As women, we have millions of other things to take care of every day. We have no time to stop and take a close look at our finances. We rely on our husbands or partners to take care of it.
For a long time, I was in the same shoes as many other women. But with my retirement age is fast approaching I worry if I am ever going to be ready.
The reason I started this blog is to get a clear vision of what lies ahead. After all, it shouldn’t be that hard to prepare yourself for retirement.
In this post, I have outlined 5 simple steps I believe will help to start your retirement plan. These steps are just guidelines and may not be perfect, but is far better than having no plan at all.
Step 1. What is your current age and at what age do you want to retire?
What age do you want to retire? Do you want to stop working and take early retirement or do you want to wait until your full retirement age? What about your spouse?
If you decide to retire early and start taking Social Security benefits at age 62, it will come with reduced pay. You might like the idea of early retirement, but you don’t want to get a reduced check from Social Security. In this case, do you have enough savings to cover your expenses until you reach full retirement age?
At full retirement age, you will receive a “full” amount of Social Security benefits. You can even get the highest Social Security payments If you can delay collecting it until you turn 70.
The age question is crucial for a retirement plan because your financial priorities change during different phases of your life.
Step 2. How do you want to retire from your job?
There are many questions come up while planning for retirement. There are few I try to figure out for myself:
- Do you know what your ideal retirement looks like? Do you have a clear vision of it?
- What are your priorities in life? is it more important for you to retire sooner with less money or to work longer and retire in comfort?
- How do you want to retire? Do you want to retire all at once? Or gradually by cutting back your work hours? Or maybe taking more vacation times?
- If you retire from your current job, do you plan to start a business or work as a part-timer at a different job?
- Will you be making more, less or the same income? In other words, do you plan to continue making money or do you want to live off your investments, pensions, and Social Security?
Retirement doesn’t mean rocking chairs anymore. There are so many opportunities and different options around us. Many baby boomers who already retired continue to work at least part-time and make some additional income at what they enjoy doing.
Step 3. How much do you need to live on in retirement?
I know this is a difficult question because none of us have a crystal ball to look into the future. But how do you decide how much money you need, when you stop earning a paycheck?
There are several rules of thumbs to calculate your expenses in retirement:
- Spend 70 to 80% of your current expenses
- Spend more money in early retirement years, then spend less as you grow older
- Spend much less in retirement, because you are afraid of running out of money
The rules of thumb may give you a quick estimate. But it’s far from perfect. It might be a good starting point for people in their 30s or 40s. But if you’re a 50+ woman and planning on retiring within 10 to 15 years, it is important to take a serious look at how much money you’ll really need.
The best way to estimate how much money you’ll need is by looking at your expenses in retirement. Think about what your current expenses are and how it will look like in the future.
These simple questions will help you to figure it out:
- How much are your current expenses?
- Will you be still paying off your mortgage in retirement?
- Will you be still paying off your debts in retirement?
- Will you be moving to a different state?
- Will you be making any large purchases like a vacation home? A boat? A luxury car?
- Will you be supporting your kids or grandkids? Or family members?
- Are you planning on traveling more in retirement?
- Are you in good health? How much will you spend on health care?
- What kind of expenses may be eliminated or reduced in retirement?
- What the least amount of money you might need in retirement?
Once you start looking at your current spending and comparing it with your expenses in retirement, it will help you to see a bigger picture.
To help to answer these questions talk to your husband or partner about your retirement goals and dreams. What you and your husband need in retirement will be completely different from your friends or neighbors. Everyone’s needs are different and everyone’s situation is unique.
Step 4. How many years of retirement do you need to fund?
Most of us would like to live to a healthy old age, but how do you predict your lifespan? Your longevity is one of the most important factors that determine how much you need for retirement.
Estimating your longevity will help to determine how much you can spend and how much time you have to enjoy your golden years. Our baby boomer’s generation will live longer than any previous generation. And that long and healthy life will cost money.
According to Social Security Administration, a 65-year old man can expect to live until 84 and a 65-year old woman can expect to live until 86.5. And those are just averages. Many baby boomers will live past age 90.
The fear of running out of money in retirement is one of the most discussed on personal finance sites. Many things could go wrong in your retirement years like long-term illness, death of the spouse, economic and stock market recessions.
If you don’t have enough money to cover the expenses, it will affect the quality of your life and put a lot of pressure on you and your family.
Here is a simple example. Let’s say you and your spouse would need $50,000 a year to live on in retirement. Your combined Social Security income is only $25,000. In this case, you would need an additional $25,000 a year in savings to cover your expenses.
You might spend 20 or 30 years in retirement. Do you have enough money saved to last that long?
There are many lifetime expectancy calculators to help estimate how long you are going to live. It is important to remember that even all calculators are based on real data, they are not 100 percent accurate. But they still help you to come up with your personal life expectancy numbers.
There is a life expectancy calculator from SSA.
There is another popular calculator “Living to 100”. You have to log in and answer around 50 health related questions. It takes about 10 to 30 minutes to complete.
Step 5. What do you want to do when you retire?
Dreaming and planning for the next phase of life should be exciting. We spend most of our adult years working, saving, investing and preparing for the golden years. There is a reason it’s called “golden years”.
Some people may want to continue their lifestyle just as it is today. But others may plan to drastically change everything and go with something new and adventurous. Or you’re somewhere in between.
What you dream about today, might be totally different from what you decide to do when you retire. But whatever you decide to do in retirement, make sure that it makes you happy.
Still not sure how will you spend your time in retirement – here is a good article from Market Watch to help you get started:
Planning for retirement is not that easy. There are many missing pieces. Creating a realistic retirement plan requires that you know what you want. It requires that you know your financial and personal goals.
Then you need to put it all together and have a whole picture. The problem is that none of us the same person today as we were 5 or 10 years ago. Our dreams and goals will change with time.
The retirement plan is not something static you can put on the shelf and forget. It’s a reflection of our ever-changing lives, goals, and dreams. If you haven’t given enough thought about your retirement years, maybe it’s time to start now. After all, in order to have a happy retirement, you’ll need to plan for everything.
Do you have a retirement plan? Are you working on your retirement plan?