Retirement Planning 101: The Basics

Brian Carrozzi - October 31, 2013

Building a retirement plan starts with understanding what your income needs will be in retirement. For a lot of people, this can be a daunting task. Many people don’t even understand what their current monthly expenses are. One reason is that it can be scary to find out those facts when they’re right in front of your face. The other reason is because it does take time to collect and analyze your numbers. Even after that, some people still get it wrong because they don’t take inflation into account. Once you figure out what your annual expenses are, you’ll need to calculate out how many years are left until you retire and account for about 3% inflation per year. If you only need $30,000 per year now to cover your expenses, you may need $55,000 per year to cover your expenses 30 years from now because of rising costs. If you estimate that your mortgage will be paid off upon your retirement, you can deduct this cost from your monthly expenses because you likely won’t have a mortgage payment at that time. One major mistake a lot of people make is that they forget to allocate their property taxes as an expense in retirement. When you pay a monthly mortgage, your property taxes are included in your mortgage payment; the bank pays them for you. Once your mortgage is paid off, it’s your responsibility to pay them yourself, and if you forget to do so or can’t, bad things will happen. Once you figure out how much you need per year in retirement income, you need to estimate how long you’ll live. This figure is not hard to guesstimate. Many insurance companies can predict this based on your age and health. This data can be found online or you can be very conservative to make sure you don’t run out of money. Once you know both of these figures you just multiply them together to get your retirement goal. For example, if you estimate that you need $50,000 in retirement income per year to meet your desired lifestyle and you expect to live 25 years into retirement then you need a total account value of $1.25 million dollars to achieve this or you need to find some other investment that will yield $50,000 per year to meet your income needs. In this case, you may be able to achieve $50,000 per year if you can find a guaranteed yield of 10% and would need only $500,000 of capital to invest to achieve this. That may be possible in the future but certainly is a hard return to find in safe investments these days.

In summary, you need to sit down on your own or with a qualified financial professional and understand both your monthly expense needs in retirement and how long you plan on living in retirement. After understanding these figures, you can know for sure what your retirement goal(s) are. When you understand that figure you can start looking for investments that will structure a successful retirement plan for you. Retirement planning can be stressful but starting early and some basic planning can make a huge difference in your ability to 100% retire versus having to go back to work at a retailer like many retirees are forced to do today. Don’t let that be you. Plan early and succeed.

Disclaimer: Please seek professional advice regarding tax liability and investing options based on your personal situation.

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