|
|
Discovering the Golden Years |
||
|
|
||
|
This is the first sunrise of the New Millennium.
Budget and ExpectationsMuch that happens in retirement depends on how much income you
have. So what is new? You have been living with the income that you had
pre-retirement, so the critical estimate is how much different your income
will be after you retire. Can you afford to retire? Will your income be
enough to meet you expenses? Should you, can you reduce your expenses? A pre-retirement test might be to try living on your expected
retirement income. This is bound to provide valuable insights. Don’t forget
to subtract the deductions for taxes and hospitalization. You might also
get valuable insights into your budget by keeping careful records of how
your income has been spent during the last year. In my personal case I
discovered I was spending several times what I had initially thought on
Amazon purchases. The point here is that you might not really know what
your expenses are. If you have a pension you are lucky. The word “pension” will
probably vanish from the English language in the next few decades. There
will be no need for it because no one will be getting one. This probably is
the last pension generation. Many companies are figuring out how to off
load their pension burdens on the federal government. Eventually the
government will discover that since no one else has a pension there is no
reason for them to offer them either. Historic Note: In the old days the
organization that you worked for promised you a retirement pension. In some
cases the employee also contributed to the pension fund. When you retired,
you received a monthly stipend. The modern sources of money are Social Security, IRAs, 401K
and personal savings. The Social Security does a good job of informing
people of what their benefits will be in their annual mailing. If you
haven’t heard from them then you currently don’t qualify for benefits
according to their records. I knew a women, who had been married five times
and as a result of several name changes her SS records were very confused,
she had multiple accounts. You could potentially have some mistakes or
similar confused entries in your SS record. You of course need to have paid into SS for 40 quarters or ten
years to be eligible to receive benefits. If you are close to meeting that
requirement it might be a good option to get a part time job to become
eligible. Because of the tax limits on IRAs are so low, I suggest that
maybe the best way to think about your IRA savings is to consider it an
emergency fund. Chances are at some point you will have a medical emergency
and you will need a quick source of cash. In most cases you should be able
to get your IRA funds within a week. Just send a personal letter to IRA
holder with a note to close out the account and a copy of the most recent
statement. For the purposes of this discussion I am including 401Ks as
part of your personal savings. How much money should you take out of
personal savings to support your retirement life style? My first instinct
would be to say none, save that money for a later emergence or to help out
in later years when your buying power has been diminished. But you saved
this money for retirement so the choice is up to you. If you divide the
total amount that you have saved by the number of years that you expect to
live; you can get a first order estimate of how much you should spend on an
annual basis. Another way to think of it is to spend the income from your
retirement savings. If it makes 5% or 10% then that is the amount you could
spend without diminishing your retirement fund. You could base this on last
years earnings so if you made 15% last year you could spend that amount the
next year. There is an obvious problem with this approach when your
earnings are negative for a given year. There is also a shock when you receive your last paycheck. To
a degree our paychecks are a security blanket and we have been getting them
for decades. When these payments stop it is a shock! You have a feeling of
instant insecurity. You are uncertain what is going to happen in the
future. No matter how complete your retirement budget analysis, that is
just theory you are not really sure you can pay your bills until you
actually do it. Another thing that happens on the down side of the retirement
discontinuity is that you are now on a “fixed income”. You aren’t going to
get raises anymore! Your cost of living increases will stop or they will
slow substantially. You won’t get bonuses and you can’t work overtime. And
you realize that some expenses will continue to increase like taxes and
health costs. You also will notice that many other things get more
expensive and almost nothing gets cheaper. Also you have to make sure to
save money for income taxes and property taxes. These big ticket costs are
now much harder to take out of a smaller income. Controlling expenses is an important consideration. Many books
suggest that you need 80% of your current income when you retire. However
many retires discover that they need more income to retire mainly because
they have more time available to spend money. One possibility is to move to
a less expensive location or to move into a smaller house. It is possible
that moving from a large home on one of the coasts to a house in a small
town in the middle of the country can net you hundreds of thousands of
dollars. This might however require a major life style change. Reducing the
number of automobiles you own may also save significant money for
insurance, fuel and maintenance. There might be a tradeoff the savings from location, house and
cars changes might allow you to travel more, might allow you go out to
dinner more frequently, or it might allow you to subscribe a theater group. |
||
|
|
|
|
|
|