How to Project Your Financial Status at Retirement
How to Project Your Financial Status at Retirement
If you're within 5 years of retirement, you can make a good projection of what your retirement financial status will be. That status means how your retirement income compares to your retirement expenses. You need to know that so you can take some quick steps if it looks like it's 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, and4. working during retirementLet's concentrate on 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 the last annual Social Security summary sheet mailed to you.Now estimate how much savings you have. Your savings include your nonpension qualified plan savings (like your 401(k) and IRAs) and any other investments you have. You want to project how much they'll be worth when you retire so we can take 4% of that value as the anual income they'll generate for you during retirement.You should have most of your savings in relatively low risk or conservative 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 what your savings will grow to, take 5% of their total current value and multiply that 5% by the number of years to your retirement. Then add that to your the total current value. Now add to that your yearly contributions to savings you'll be making 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 them to 4%. That gives you your retirement income from your projected retirement savings.Now add up the first three retirement incomes sources(i.e. pension, Social Security, and savings' income) to give you an estimate of your projected retirement income per year without having to work in retirement. You want to compare this with your projected retirement living expenses.*Project Your Retirement Living Expenses:Add your necessary living expenses and your optional expenses you'll incur during a year in retirement. If you're planning to live where you're current living then use the yearly expenses you pay now.Some advisors think that you can estimate your expenses as 75% of your current working income. But this seems high to me. If you're planning to live elsewhere, make an estimate of those expenses.Your necessary living expenses are:1. housing (rent, RE taxes, mortgage),2. utilities (tel., electricity, gas, oil),3. transportation (insurance, gas, repair, replacement),4. clothing and5. taxes (perhaps10% of income).Your optional annual expenses for:6. entertainment (dinners, movies, pocket change, etc) and7. travel.Now add all those expenses and compare their total to your projected annual retirement income from above.*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 by1. Saving more each year for the next few years to enhance your assets - and the income they'll produce, and/or2. Working part-time during some of your retirementAnd/or you can diminish your retirement expense by3. Reducing unnecessary expenses, and/or4. Moving to where the cost of living is lessIf 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 realize that you can enhance them.Don't turn a blind eye to doing this. Knowing your retirement financial status is essential to improving it in ways you haven't thought of.
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