Money Matters: How can you plan for your retirement income needs?

Guiding individuals as they plan for retirement requires careful thought and data gathering. Generally, the goal for many is independence (the ability to do what they want) and dignity (the ability to do what they want in the manner they wish). A foundational aspect of planning for an enjoyable retirement requires a detailed focus on the factor that can help you achieve independence and dignity—your income.

It is critical to estimate how much income you will need to fund your retirement. That’s not as easy as it sounds, because retirement planning is not an exact science.

Use your current income as a starting point

It is common to discuss desired annual retirement income as a percentage of your current income. The appeal of this approach lies in its simplicity and the fact that there is a fairly commonsense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you will no longer be liable for (eg, payroll taxes) will, theoretically, allow you to sustain your current lifestyle.

Related: When a Roth conversion makes sense—and when it doesn’t

The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100% (or more) of your current income to get by. Using a percentage of your current income as a benchmark is fine, but it is worth reviewing your current expenses in detail and considering how they will change over time as you transition into retirement.

Project your retirement expenses

You may have a hard time identifying all your expenses and projecting how much you will be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

• Food and clothing

• Housing: rent or mortgage payments, property taxes, homeowners’ insurance, and property upkeep and repairs

• Utilities: gas, electric, water, telephone, cable TV

• Transportation: car payments, auto insurance, gas, maintenance and repairs, public transportation

• Insurance: medical, dental, life, disability, long-term care

• Health care costs not covered by insurance: deductibles, co-payments, prescription drugs

• Taxes: federal and state income tax, capital gains tax

• Debts: personal loans, business loans, credit card payments

• Education: children’s or grandchildren’s college expenses

• Gifts: charitable and personal

• Savings and investments: contributions to individual retirement accounts, annuities, and other investment accounts

• Recreation: travel, dining out, hobbies, leisure activities

• Care for yourself, your parents, or others: costs for a nursing home, home health aide, or other type of assisted living

• Miscellaneous: personal grooming, pets, club memberships.

Don’t forget that the cost of living will go up over time, and keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates. (It is always best to be conservative.)

Decide when you will retire

To determine your total retirement needs, you also have to estimate how long you will be retired. Why? The longer your retirement, the more years of income you will need to fund it. The length of your retirement will depend partly on when you plan to retire. For example, you may see yourself retiring at age 60 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it is great to have the flexibility to choose when you retire, you must remember that retiring at 60 will cost you much more than retiring at 70.

Estimate your life expectancy

The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you will have even more years of retirement to fund. You may even risk outliving your savings and other income sources. To guard against that risk, you will need to estimate your life expectancy. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There is no way to predict how long you will live, but with life expectancies on the rise, it is probably best to assume you will live longer than you expect.

Identify your sources of retirement income

The next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? These may include a pension that pays you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include 401(k) or other employer-sponsored retirement plans, individual retirement accounts, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your earnings will be another source of income.

Make up any income shortfall

If you are lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you will come up short? Don’t panic—there are probably steps you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

• Try to cut current expenses so you will have more money to save for retirement.

• Shift your assets to investments that have the potential to substantially outpace inflation. (But keep in mind that investments that offer higher potential returns may involve greater risk of loss.)

• Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example).

• Work part-time during retirement for extra income.

• Consider delaying your retirement for a few years (or longer).

Investment advisory services offered through MEDIQUS Asset Advisors, Inc. Securities offered through Ausdal Financial Partners, Inc. Member FINRA/SIPC 220 North Main Street Suite 400 Davenport, IA 52801. 563-326-2064. MEDIQUS Asset Advisors and Ausdal Financial Partners are independently owned and operated. This newsletter is not and is under no circumstances to be construed as an offer to sell securities. Ausdal Financial Partners and its officers and employees may have an interest in the securities mentioned herein. The information set forth herein has been derived from sources believed to be reliable, but it is not guaranteed as to accuracy and does not purport to be a complete analysis of the securities, companies or industries involved. Past performance does not guarantee future results. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses. The opinions expressed herein are those of the authors and not necessarily those of Ausdal Financial Partners. Additional information is available upon request.