Filling in the Retirement Gaps

Wednesday, February 09, 2011

Dan Forbes, GoLocalProv Financial Expert

Whether you’re 35 or 65, most people reading this at work have probably had the same thought while collating reports at some point in the last month: When the heck can I retire? It doesn’t necessarily mean you WILL retire (we all love our jobs and would do them for free!) You’d just like to know WHEN you can safely retire, on the off chance that your golf game improves enough to join the senior tour. It’s as simple as A – B = C. A is what you’ll spend in retirement. B is equal to what you’ll receive in Social Security and pensions. That leaves you with C: what you’ll need to generate in retirement income.

Retirement Budget

You’ve probably seen the commercials where people are walking around carrying their retirement numbers – typically something in the high millions. That’s not too scary, right? The bottom line is you don’t necessarily need $3 million dollars to retire. You need enough money to satisfy what YOU spend on a yearly basis. That’s another reason it makes sense to figure out your current budget and then adjust it for retirement. Will your mortgage be paid off? Will you want to spend more on vacations and travel? Is it possible that the 30 year old you’ve been supporting will meet the financially independent mate of your dreams?

Social Security

Those currently retired get a little more than of third of their retirement income for Social Security. As you may have heard, this entitlement is in a little bit of trouble. You’ll hear people say, “Don’t count on Social Security”. The truth is you probably can count on Social Security in a reduced payout structure and starting a few years later.

Pensions

Defined benefit pensions are on the way out, so this will be less of a factor for those retiring in the distant future. The number of large companies offering them has dwindled precipitously over the last few years as companies are moving to defined contribution plans. Those receiving government pensions should also be ready for a serious overhaul.

Retirement Plans and Outside Accounts

So now you have your expenses and a reasonable expectation for a steady income from Social Security or pensions. It’s time to look at your other assets to see what kind of income can be generated from them. This includes retirement accounts, bank accounts, properties, cash value life insurance policies, etc. An old rule of thumb used to be withdrawing 5% from your asset base to live on, but that percentage is now closer to 4%. If you’re truly risk averse, you can look at using a portion of your assets to buy an “immediate annuity” to cover any retirement shortfall – this is the equivalent of purchasing a pension from an insurance company.

So, whether you’re 35 or 65, you should be able to project all of thee numbers to give you an idea of what you’ll need to generate in retirement income. Then it’s just a matter of perfecting that golf swing.

Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at [email protected]