How to Project Your Financial Status at Retirement
By Shane Flait © 2010

If you’re within 5 years of retirement, you can make a good projection of what your retirement financial status will be; and that means how your retirement income compares to your retirement expenses. You need to know that so you can take some quick steps if you’re in bad shape. This article shows you how to project your financial status.

Project Your Retirement Income:

Your retirement income comes from one or more of four sources. They are your:

1.      pension income,

2.      social security income,

3.      income from your savings, and

4.      working during retirement 

Let’s concentrate of the first 3 before worrying about having to do some retirement work.

You get a stream of income from the first two. Ask your company for an estimate of your pension income.  Then estimate your social security income using their website. You can estimate this easily or refer to your last annual Social Security summary sheet they mail to you.

Now estimate how much savings you have. These include your nonpension qualified plan savings (like your 401(k) and IRAs) and any other investments you have. We want to project how much they’ll be worth when you retire so we can take 4% of that as the income we can use from it annually during retirement.

You should have most of your savings in conservative and safe investments if you only have a few years to retire. That way you can count on them being there when you need them.

To estimate how much it will grow, take 5% of the total, multiply that amount by the number of years to your retirement and add that to your total. Add to this your yearly contributions you will make each year until you retire. That gives you a rough estimate how much savings you can withdraw from at the start of retirement.

So as not to deplete your savings during retirement, restrict your annual withdrawal rate from then to just 4%. And that gives you your retirement income from your savings.

So add up the first three incomes (pension, Social Security, and savings’ income) to give you and estimate of your projected retirement income per year – without working during retirement. You want to compare this with the expense you’ll incur when you retire.

Project Your Retirement Living Expenses:

Add your necessary living expenses and your optional expenses you’ll incur during the year.

If you’re planning to live where you’re current living then use your yearly costs you pay now. Some advisors think that you can estimate your expenses at 75% of your current working income. But this seems high to me. If you’re planning to live elsewhere, make an estimate of those costs.

Your necessary living expenses are:

·         housing (rent, RE taxes, mortgage),

·         utilities (tel., electricity, gas, oil),

·         transportation (insurance, gas, repair, replacement),

·         clothing and

·         taxes (perhaps10% of income).

Your optional annual expenses for:

·         entertainment (dinners, movies, pocket change, etc) and

·         travel.

Add all your expenses and compare them to your projected annual retirement income.

The critical comparion

If your retirement income exceeds your retirement expenses, you’re in good shape. But if your retirement income is less than your retirement expenses, you’re going to have to make some important decisions.

You can choose to enhance your retirement income by

• Saving drastically more each year for the next few years to enhance your assets – and the income they’ll produce, and/or
• Working part-time during some of your retirement

And/or you can diminish your retirement expense by

• Reducing unnecessary expenses
• Moving to where the cost of living is less

If you can’t reasonably increase your retirement income to satisfy your protected retirement expenses, you’ll have to come to term with either working in retirement or moving to lower your retirement expenses so you can afford them.  

Knowing is better

It’s better to make these retirement financial status estimates as soon as possible so you have time to enhance your future prospects – and you can enhance them. Don’t turn a blind eye to doing this. Knowing your status is essential to improving it in ways you haven’t thought of.

 

 Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com