As the age of retirement nears, it is normal to feel a little panicked. You become aware of expenses you hadn’t anticipated and you realize you may have miscalculated how much of your retirement income is taxable. The biggest worry of all is how long your money will last. Follow some basic steps to calculate what you are likely to need for retirement so you don’t outlive your savings.
Age of Retirement | How to Enjoy Your Golden Years without Worrying About Money
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The Faulty Reasoning Behind Actuarial Tables
For those who want to know their age of retirement, they rely on actuarial tables provided by insurance companies to determine their life expectancy. You can also find an online calculator on a website such as the Social Security Administration (SSA).
You simply add the variables of your life, such as current age and gender. The spreadsheet then calculates the odds of your living until various birthdays.
Of course, actual insurance companies find these tables useful when it comes to setting life insurance rates for large groups of people. When it comes to making decisions for you or your spouse, however, you need to understand how the numbers break down for just one or two people.
Currently, the SSA estimates the average woman about to turn 65 can expect to live until age 86. A man turning the same age can expect to live until age 83. It is also important to note that one in four people will live past 90, and one out of 10 will live past 95.
By the same token, some men and women will die before they reach 83 or 86, respectively. Otherwise, the average life expectancy would be higher. Unless you have a known severe health problem, it is smart to assume you will live at least until the average age.
Why It Is Smart to Assume the Best
“Assuming the worst” is usually described as the best way to approach savings. It means you plan for rainy days and situations of all shapes and sizes.
When it comes to the ultimate “worst” — your death — it is best to assume the best.
Why? If you are pessimistic about your life expectancy, you are likely to make bad decisions on issues that affect your age of retirement, including pension plans or the amount you divert to savings.
For instance, say you get a letter from a previous employer with whom you have a pension plan. It offers the chance of an immediate buyout rather than a monthly pension plan starting at your average retirement age (or normal retirement age) or the remainder of your life.
Many people will opt for the immediate payout. That is not unreasonable if they immediately roll that money into individual retirement accounts (IRAs).
Some folks, however, think they should enjoy themselves now and spend that money because they may not even be around in 25 years. They are assuming the worst when it comes to their mortality.
The problem with this calculation is that you will be ignoring a grim possibility: being elderly without monthly benefits to provide for your basic needs. This is a frightening thought, but it is one you need to face when you are making decisions that may impact you and your family for decades.
Many financial planners who specialize in retirement planning assume the age of 100 with their healthy clients. It may seem unrealistic to you now, yet this strategy allows you to make plans that assure you will have retirement benefits based on the “best-case scenario” of old age. Of course, it also means if some of those years require extra care, you will have a base income to fund it.
Look at Your Likely Retirement Income
If you have not done so already, go into the SSA site, as well as that of your pension provider. Determine the monthly amounts of Social Security benefits and other retirement benefits you will receive if you begin to draw on them upon your expected age of retirement. Do this for both your spouse and yourself, if applicable.
If you and your partner have a significant age difference, you may have to calculate two phases of retirement. The first will be for the period in which one of you is receiving retirement benefits and the other is still working. The second phase is for when both of you have reached the age of retirement.
Calculating your actual monthly income after taxes and other variables can be difficult. Consult a retirement advisor to help you understand what you can reasonably expect to receive.
Determine Your Future Expenses
You cannot know all of the emergencies that may arise after retirement, but there are certain predictable expenses you can calculate now. These include monthly bills such as utilities, car insurance, food, and gas. Modest luxuries such as clothing, hair care, club membership, and entertainment should also be factored in.
There may also be new expenses upon reaching the age of retirement. One of these is a higher healthcare expense. Some people also forget to remove current debt that will be paid off by retirement. Your mortgage is a good place to start.
If you own your home, do you expect to have paid it off by the time you retire? Will you be finished contributing to your children’s college expenses or student loans? Are you about to finish paying off a car loan without having to replace it for several years? Do you have a longstanding tax or medical debt that has an end date? Will your gas budget plummet once you no longer have a long commute?
Then consider potential budget items post-retirement. What are your plans? Will you be flying cross-country twice a year to visit grandchildren? Are you buying an RV or starting a new business?
If you can identify those goals, it is important to calculate how much they will cost and divide by 12 to estimate the monthly budget for each objective.
Examine Your Income-Building Options Upon Age of Retirement
Even after you reach the average age of retirement, there are ways in which you can make your income-to-expenses picture brighter. These options include:
- Hold off on retirement for a year or two. This strategy gives you a chance to make more investments, as well as to pay off debts.
- Delay drawing on Social Security benefits past the age Social Security sets as a minimum. The longer you wait to begin drawing, the higher the amount will be.
- Start drawing on just one type of retirement benefit as soon as you are eligible. Use that money to invest in an IRA.
- Invest in the best investment portfolio through a reputable broker.
- Use your work or hobby to become a freelancer or consultant.
- Downsize your expenses by moving to a less expensive home, finding cheaper health care plans, or even growing your food.
Remember, there is always time to make adjustments to your strategies even if you have already reached the average age of retirement. A retirement planner can help identify potential new income. These qualified professionals can also find ways to maximize your Social Security and other benefits when you retire.
What is your ideal age of retirement? What is your game plan to retire comfortably? Tell us your thoughts in the comments section below.