Will You Be Able To Retire? Saving Yourself!

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Will You have Enough Money To Retire?

Brief History Lesson:

The term “retirement” came to be recognized when the Social Security Act of 1935 allowed people to collect a tax funded paycheck when they reached the age of 65.  Of course, the average life expectancy at the time was only 62.  Due mostly to significant medical advancements, life expectancy’s continued increasing and people began looking forward to living beyond age 65 and collecting a paycheck as a reward for their lifelong hard work.  Retirement was billed as a life of leisure and relaxation.

How will you replace your pre-retirement income?

Let’s use an straight forward example.

You are 50 years old and earning $100,000 per year.  By the time you are 65 you may be earning $200,000, and hope to be able to get by on $120,000 a year at retirement.

Possible Expenses:

Retirement monthly expenses:               

Costs in 2027

Mortgage

$2,000

Property Taxes

$2,000

Homeowner’s ins.

$150

Utilities

$500

Groceries

$500

Entertainment

$500

Clothing

$300

Gifts

$100

Car payment

$500

Auto insurance

$150

Travel

$1,000

Life & long term care insurance

$500

Total take home monthly lifestyle need

$7,700/month

In an environment with a 20% federal tax bill and 5% state tax rate, you would need to have a pretax income of $123,000/year to make this work.

As you can see, more than half of the overhead comes from the mortgage payment and property taxes.  If you live in DuPage County, you probably refinanced sometime in the past few years and will owe on your mortgage for another 25-30 years.  Also, property taxes are quite high in this area and are only going up every year.

Retirement is much more manageable if do not have a mortgage or move to a smaller home or a home in an area with lower property taxes.

Retirement Income

What are your sources of income at age 65?

  1. Social Security (if it’s around) – $30,000
  2. Your 401k and IRA’s – Currently worth $250,000 – Worth $1,000,000 at age 65
  3. Pension (I’m going to assume the answer is Not Applicable –  those with a nice pension have it pretty easy in retirement)

What can you hope to comfortably pull every year from a $1,000,000 investment account without digging into principal?  One rule of thumb is 4% or $40,000.

That means your retirement income would be $70,000 ($30,000 +$40,000).  That’s a far cry from the $200,000 you were making at the end of your career.  Sure, you could sell your home and move to something much smaller and get by, but is that the route you really want to take?  Taking out more than 4% of your investment account is considered risky, so that is not a good option.

The best option, find something you enjoy doing and get paid to do it.  If you can continue working, even part-time and earn a fraction of what your full-time job paid, that will make the retirement income dilemma much easier to get through. 

I would like to hear what your retirement income plan is and what you think is the key to successful retirement will be for you.

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Posted in Achieving Financial Independence, Post-Retirement Planning, Retirement and tagged .

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  1. Pingback: A Million Dollars Doesn't Go as Far as it Used to | Life Planning Today

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