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“Life is what happens to you while you’re busy making other plans.” John Lennon. “Plan for your dreams or life will just happen to you” Me. Following are the guiding principles that I use in my retirement planning process. I use these rules to guide me in my decision-making. 1. Don’t pick a Retirement Age, Choose How You Want To Live! More people take their pensions at 62 rather than at 65 or 66. I believe that is because they can get an income check rather than it being a part of their plan. If you make a plan, your retirement age will fall out of the math. Just figure out how much you need to live life your way, then add up all your monthly incomes, use the social security numbers for different retirement ages and voila, retirement age drops out.
The average pension check is just over $1000 per month. Can you live on that? Suppose there are two wager earners both getting checks of $1000 per month. Can you live on that today? Probably not! Even those fortunate enough to have a private pension will have a meager living. Medicare will become more expensive and cover less. There is a growing trend towards “Medicare Top-up” private insurance that costs the going Medicare rates plus some. Bottom line: you will need to save. 3. You Can’t Rely On The Government I expect them to renege on their promises and weaken Social Security and Medicare. Medicare problems are imminent and Social Security problems are on the horizon. Bottom Line: build contingency into your plan so you are not destitute. For example, worst case on Medicare is that it will be worthless (not likely) so plan on buying insurance. Can you afford it? You will need to save. 4. Debt Is Your Enemy Figure your current budget, with and without debt, and then compare that to your last Social Security statement(s) that arrived a couple of months before your last birthday. It will become obvious to you. Plan to get rid of as much debt as possible. 5. You can draw down 4% of your savings per year. (According to Fidelity research.) So figure out how much you want in cash each month to live how you want. Multiply by 12 to get the annual amount. That number is 4% of your total savings so you can calculate what you need in your nest egg. (Don’t let it be an empty nest) 6. Inflation Is Your Enemy. Current inflation is approximately 3%. This means that your savings must earn your 4% drawdown plus 3% inflation to have the same value as when you started. That is 7%. If inflation were 0% your savings will only have to make 4% to sustain itself. Currently you can get about 5% in money markets or CDs. Go Fed! 7. You must be in the Stock Market Since inflation is not zero, the best place to invest a part of your savings over the long haul is the stock market. Over a long period of time the stock market has returned an average of 10%. Do not put short-term needs in the stock market. Take the long view. From point 5 above, it should be obvious that if you earn above 7% overall your nest egg will grow in value. If you make less than 7% overall, it will shrink and you may run out of money. 8. Max-Out Your Employers 401K Anytime your employer wants to give you money in a matching contribution, take it. They are no longer giving pensions so you need to take what you can get. If you can’t max them out then do what you can, but get started. 9. Make A plan Obvious, but most people do not. Get help if you need to. 10. Forget The Rocking Chair Forge a new life. Get ready for retirement before you get there by accumulating interests. You’ll need to know how you want to live for your Retirement Income Plan to make any sense. Comments9 Comments so far |
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[…] ~ Empty Nest has a great post in just before the Top 3 deadline on Retirement Income Planning- 10 Guiding Principles. […]
I really like the active approach you take here. Our culture seems to program us into being dependent and just trusting others with our future. I don’t like that. This is a much better way to do things. And I also really enjoy your take on retirement being about being active and living!
I appreciate the positive comments Paul
[…] In order to best understand this post, you should read my post titled “Retirement Income Planning - My Guiding Principles”. If you haven’t read it, go here first. I have looked at investment company websites and generated plans according to their software but this approach has always left me cold. There is something about handing off my security to someone trying to sell me something that is less than encouraging. Besides, it always seems so complicated. It’s no wonder that people go to financial planners. Its just too darn complicated. So I set out to devise an approach for myself that was easy to grasp, an approach I can actually hold in my head and act on with certainty that I knew what I was doing. A plan I could actually visualize and made sense to me. It starts with the 5-year rule. […]
[…] retirement income planning - my guiding principle […]
[…] Maureen presents Retirement Income Planning – My Guiding Principles posted at Empty Nest. […]
[…] Empty Nest was a part of the “Festival of Investing” on Investing Today for their post titled, “Retirement Income Planning - My Guiding Principles.” They also participated in the “Cultivate Greatness” carnival with the article “Attitude is everything.” […]
[…] 3) The gap between what you want and what you have must come from investments or other income streams. Lets say the gap is $1000 a month. Then your plan is short $12000 per year. According to my guiding principles this represents 4% of your savings, which means you need savings equal to $300k, and it must grow at a rate that meets or exceeds inflation plus the 4% drawdown. This is how you take care of inflation and why you do not need to figure it in to your plan today. Make sense? […]
[…] I wrote the original Retirement Income Planning Guiding Principles post (you can see here) I missed out one very important one. This principle applies more in the years after retirement […]