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How Do I Know if I Have Saved Enough for Retirement Based on My Current Lifestyle?

In this video, we’re going to deal with the question, “how do I know if I’ve accumulated enough money to be able to retire successfully?” And I’m going to help you put a price tag on what your retirement could look like. That’s coming up next.

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So one of the problems when it comes to retirement planning is really the way we think of retirement planning. We don’t think of it like we think of most major purchases that we make in our life.

What if we actually thought about it in a different way? What if we transform the way we think about retirement?

For example, you know, most major purchases when it comes to things like buying a car or buying a house, we know what the house is going to cost when we go to buy the house. We know the price tag when we make that purchase. When it comes to retirement for some reason most people think of it as this nebulous thing where they hope they’ve accumulated enough money so that they don’t run out of money and they don’t have to go back to work in their later years. That’s about it.

But they don’t think of it in terms of what’s the price tag of that purchase? What does retirement cost as if I was buying it? That’s a different way of thinking of it. So how do you think of it that way? Let’s go through the steps.

First and foremost, it really comes down to what is the spending rate you’re going to have in your retirement. That’s not something most people think about. Most people don’t even think about what they’re spending today. So, as I’ve often encouraged, you begin by knowing what are you actually spending today. And how does that compare with what you’d be spending during your retirement?

So for example, were you to get to the point of retirement if you woke up tomorrow and you were retired, what would your spending look like? Would you have a mortgage or would you have a mortgage paid off by that point? Would you take up new hobbies? Would you travel more? What adjustments would you have to make with regard to health insurance? What about the normal expenses things like cell phones and taxes and utilities and things like that?

So, once you go through and actually know what your spending is going to be like during retirement, really, that very first month of retirement. And just to keep things simple if you think of it in terms of today’s dollars don’t think of it 20 or 30 years from now. Think of it as if you’re retired right now. I want you to come up with that monthly amount as to what you believe you’ll need in retirement to maintain the lifestyle that you would like to have in retirement. You then take that number multiply it by 12 and that becomes your annual target. That’s your goal.

So, just to keep things real simple let’s say you determine you need $80,000 per year. That’s what you expect to spend the very first year when you retire.

So, what do we do next? The next step is we have to look at what guaranteed fixed income sources you’re going to have during retirement that would help to offset that expense. For example, Social Security. When you claim social security and start receiving that monthly check, that’s going to help offset your expenses. So from that number, from that spending rate goal, we would deduct the amount you anticipate getting from Social Security. Once again, just to keep things simple, let’s say it’s 80,000 is your goal. Let’s say you and your spouse expect to get $30,000 per year. So $80,000 minus $30,000, now we’re down to a shortfall of $50,000 per year.

What other sources of income may you have during retirement? Well, you might have a defined benefit plan if you work for the Florida Retirement System for example. Or another government entity. Or a big company that had a defined benefit plan based on the number of years that you work there. That might provide you an additional check in addition to Social Security. That will also be deducted against that spending goal. What about part-time work? What if you or your spouse want to do some part-time work during retirement. Certainly, that would be another source of income. Although it might be for a limited number of years. You may say okay during the first four or five years I expect to work but then I’m going to call it quits. So that also would help offset that spending.

Once again, just to keep things real simple. Let’s use 80,000 as a goal, you have $30,000 coming in from social security. $80,000 minus $30,000 is $50,000. That’s the shortfall. Now you may be asking yourself okay if I need 50,000. where am I, where am I going to get that from? Well, clearly that’s going to come from your savings. That’s going to come from all the things you’ve accumulated during your working years like your 401k, your IRA, your Roth accounts, any annuities you may have accumulated, any other savings you may have put outside. That’s designed to have accumulated for that deficit, that shortfall of $50,000 per year.

But, at the beginning of this video I said, we’re going to look at this as if it’s a purchase. We’re going to try to put a price tag on retirement. And here’s the key on how to do it. If you take that shortfall, whatever the shortfall is for you, say in this case it’s $50,000 per year, and you expect to live 30 years in retirement, a nice long retirement, you take that shortfall of $50,000 per year, times 30 years, that’s 1.5 million. That’s the price tag of the retirement that we just described.

In other words, if this person in the scenario has accumulated 1.5 million, they have enough money to spend down at a rate of $50,000 per year. Now I know some of you are saying yeah what about investment returns? What about inflation? What about all these other factors? Certainly, those are important considerations, and if you’re doing a full financial plan. Those would be things that you would integrate into the financial analysis.

But just to keep things real simple, and shift our thinking in terms of how we think of retirement. What’s the price tag of that retirement? $1.5 million. If you’ve accumulated $1.5 million, you could generate $50,000 per year. Now obviously the $1.5 million, assuming no growth rate, would slowly decline, but you have enough money to live that lifestyle, based on those numbers.

So hopefully this helps you think about retirement differently, thinking of it as a purchase. And oh, by the way, all that money you’re putting into the 401k or the IRA here, that’s your down payment towards purchasing retirement.

Hopefully, like I said you found this useful. If you did please like it, share with your friends, send in more questions, and subscribe.

Thank you very much.

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