We all work hard and save money in various ways to take over and produce the income we will need when we quit working. Most people use a 401(k), while a smaller number of people own their own businesses. Either way, everyone will need to do the following planning:
Income: To help you decide when is the best time for you to retire, I suggest you determine your current income and then what percentage of that income you want to retire on. Be conservative, because you have got to live with this decision for the rest of your life.
Expenses: After you have a clear picture of your future income, then do the same with your spending or projected expenses. Prepare your expenses for today and then again after you retire. For example at retirement, you won’t need to spend money on gasoline to make the commute to work, but you might spend more money on travel to see family members — some expenses will go down, while others will go up.
You can also decide to retire when your retirement income will be
greater than your expenses. This approach sounds simple, but it super-charged with many emotional issues. Consider these facts:
- The U.S. Census shows the average person reaching age 65 has less than $60,000 in total assets.
- Twenty-seven percent of all working people don’t balance their checking account.
- Of all the people who have access to a 401(k), only 17 percent participate in saving money there.
This is not a good track record for the American worker, showing that not very many of us will enough retirement income to exceed expenses.
How Can You Check to See If You Will Have Enough to Retire?
Go to www.moneymastery.com and sign up for the free basic service. Then use the online Money Mastery software to build your Spending Plan. Input income less taxes and then enter all expenses by category. The software will calculate whether you will have surplus or not. If you do, congratulations! You can use this surplus money to pay down debt by creating a Debt Plan (something the software can also help you build), use it to create emergency savings, and put the surplus towards retirement. If you do not have a cash surplus and are spending more than you are making, you must get your Spending Plan in balance by reducing expenses where necessary and/or finding more income.
Once you have a balanced Spending Plan created for the way you live right now, use the software again to build a Spending Plan for after you retire. Creating the plan is a three-step process:
1) Select the age you want to retire and enter it in the software.
2) Enter your income at retirement minus any and all taxes.
3) Enter expenses you think you will have in your retirement years.
If the software shows your retirement Spending Plan balanced or with a cash surplus, then you know the age you have picked for retirement is correct. Now review all the following CAUTIONS to verify the time you have selected to retire is right.
CAUTION #1: Decreased income when spouse dies. If some of your income will go away in the event a spouse passes away, you will need to use the software and adjust your income to reflect your new circumstances. If the Spending Plan still shows a surplus, then at this point, your retirement date is more than likely accurate. However, if the plan shows a negative number, you may need to work longer or adjust some of your spending categories.
CAUTION #2: Taxes can be complex and deceiving. While you were raising a family you had deductions that you no longer get at retirement. While you might have had a mortgage while you were working, you received an interest expense deduction that offered some relief. Hopefully you have paid off all your debts by the time you go into retirement. In most cases, your taxes will increase as a percent of the total income at retirement. Anyone can go to www.irs.gov and use their tax calculator to estimate what their taxes will be at a predicted retirement age, given specific numbers. This may be an eye-opener, but very necessary. If taxes will eat into your income, you will need to project those on the Spending Plan to see where you might come up short at retirement and make plans now to make up for those shortages.
CAUTION #3: The rules are always changing (as taught by Money Mastery Principle 6). An example of how rules always change that is occurring right now is within the U.S. legislature. They are passing a new law in the fourth quarter of 2015 that will eliminate two popular Social Security provisions (“File-and-Suspend” and “File-and-Restrict”) that would have added more money to retirees. Both houses are in agreement and the bill will go into effect six months after the law is approved in 2016. So far they will grandfather any person who executes these provisions before the expiration.
CAUTION #4: Don’t let a year go by without forecasting your retirement income and expenses. As you prepare this Spending Plan each year, you will find that you don’t know everything. It is hard to know what Social Security benefits will be. It is difficult to know how to invest your 401(k) money so the market doesn’t lose money. Again, how can you possibly know what your health will do? If it changes, you might have expenses that drain off a substantial amount of your retirement money. Be assertive at getting answers to the questions that arise from building a Spending Plan. As the years come and go, you will be so much better prepared to meet retirement issues head-on.
In my experience, not one person out of a hundred will make this planning effort. They spend more time planning their summer vacation, than they do planning for the rest of their lives… don’t be one of them. Start planning today!