When it comes to planning your retirement, the most important things to keep in mind are:
Will you have enough to pay the basic needs bills, and
Some to spare for a little travel, and
A little entertainment, and
A little just fun money.
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That is vastly oversimplifying it, but basically that is what it comes down to for most of us. Yes, I know that planning for leaving some for the kids and grandkids needs to be thought about too, but, that should be for money that is left after the above four considerations are first covered and will be for columns of another day.
Today, I want to focus on just one of the four costs above, the basic costs of retirement. I want you to see this need in different, more concrete terms. And, so that you already retired folks will know, I will be talking primarily to the not-yet-retired folks trying to alert them to all the details you already-retired folks face every day. OK? Good.
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When you not-yet- retired reach retirement age, you will have put in over 40 years, typically, building a career doing whatever it is you found interesting (hopefully), profitable (also hopefully), and sufficient to generate surplus funds to support you in a retirement life expectancy of 15-20 years.
Now, it is one thing to talk about retirement in fuzzy, "Yes, I know it is important" terms, but a very different matter to actually sit down and talk about the practical day to day living needs of the retirement years.
Stop and think about it. Would you plan your current monthly budget in fuzzy terms? Of course not! In actuality - the real world they call it - you sit down each month, look at the bills that have arrived, add the grocery and gas needs, add in any special expenses you have (repair the car, furnace, new roof, etc.), and then allocate the funds coming in from your salary, bonuses, and other income and allocate it to the outgo and put the surplus in an emergency fund that would support the family for at least six months (a fund that may be needed if your job were for any reason no longer there).
Once this emergency fund is adequate, you set aside the excess funds and decide how you will use it to the best advantage of the family unit — college expenses, trips, new car, add to retirement funds, etc.
Now, let me ask you, why wouldn't you do the same kind of nuts and bolts work for your retirement years? I mean, more specifically, sitting down and doing the number crunching now, well before the retirement years get here?
I really can't think of any reason why you shouldn't. So, let's do a little exercise here and take a look at how you might begin to go about preparing for the basic costs of those years.
Here are some of the more important decisions your need to make to begin our little exercise:
Where will you retire geographically?
If you intend to move, do you know the cost of basic living expenses in the area you chose — food, electric, gas, water, real estate taxes, rubbish collection, etc. and what companies (address and phone included) best supplies these needs?
If you have decided to retire in your present house, will it be paid off or will some portion of a mortgage remain into your retirement years?
If you are going to move, will you be able to buy a home for cash or will you need a mortgage to buy the house and what about moving costs? They can be quite daunting depending on how far you intend going away from your present residence.
(5) If you move will you need to add furniture (make a list) or size down if need be (including what items will be sold or given away). This figure adds up to big dollars, too.
Yes, I know there are other questions that might be asked, depending on your lifestyle (any country club or golf courses nearby, or symphony orchestras, etc.), but those are considerations unique to your situation and I want to stay with the general basics here.
Once you have answered the five questions above, sit down and make a budget just like the one you now make every month. Use the costs you researched to do this (it will be easier if you intend to stay in your present house, but will take more time and effort if you plan to move).
Now that you have this monthly total, I want you to multiply it by 216, the number of months (18 years) current tables call our "life expectancy." True, you may live a longer or shorter period than this, but this is a fairly good actuarial number they tell us and we have to start somewhere.
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The resulting dollar total is the amount (in today's dollars) you will need to see you through retirement for just basic needs, (not including the other three categories of funds needed which I stated in the opening paragraph of today's column).
We will not go through all the calculations needed to adjust for inflation and the like, that's for another day. I just wanted you to get a feel of what it will take just to "be here." What does it feel like to you? Does it surprise you a bit? I am not surprised at all. Most folks react the same way.
So, why did we go through this exercise? First, now you can actually see (in today's dollars) what it will cost to retire and just "be here," as I put it earlier.
Second, I wanted you to have a real benchmark to use when you talk about retirement to your partner for life or to your financial advisor. You really do need this starting point to talk seriously about retirement costs. From here, you can begin to talk about the other costs of retirement (the other three categories in my first paragraph) and expand your plan accordingly.
Lastly, I wanted you to better understand that every column where I talk to you about getting a better return on your money set aside for retirement - for example, looking for that 6½ percent return from a dividend stock instead of a 5 percent return from a Treasury bond, truly makes a big difference.
It is highly important where you put your money to work for you. In this case, a total of a 30% percent difference in final dollars ready for use at retirement time. We are talking a big time reality here!
What I hope you have gained is some better insight into why you need to begin your plan for retirement with your feet on the ground and begin it now. It is one thing to say you would like to retire on a $50,000 income (I'm talking about in today's purchasing power) and really understanding what it will take to get there.
As I said several times, you will never get to that goal by thinking in some sort of fuzzy terms or general theory about what it might be like at retirement time. Sit down, get to bedrock reasoning with hard numbers, and talk about real aspirations and real needs. Do yourself and your family a big favor, be prepared.
Well, that's about all for this week. Hope your coming investment week is a good one. In the meantime, keep in touch. I do! See you next week.
Editor's note:
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