We are getting to an era where many people will have to work longer, retire later, and still work.† In most cases, although hard to admit, it is because we had other things that we judged more important than providing savings for what can easily be a third of our life.
Most folks simply imagine that they can use the money from a job in retirement to fortify their current spending. WRONG!† If you spend it all during your retirement working years, you will have to face up to an abrupt reduction in income after you fully retire.
Some people believe that theyíll work till they die.† Wrong again!† Elderly workers face huge hurdles.† First, itís harder to get a job because employers believe that you will not be a long-time employee.† They know youíll be drawing more days off for sick leave, and you will adversely affect insurance premiums.† They also worry that it may be difficult to fire you because of the age-discrimination laws.† But even when you find employment, you need the physical stamina to keep up with the younger workers.† Further, your skills may be way out of date.
But letís say you get a job.† So how much of that working income can you spend?† I suggest that the absolute most would be your monthly take-home pay (after all deductions and taxes) multiplied by the number of years you will still work divided by the number of years itís possible you have yet to live.†
Example:† A 65 year old plans to work for 10 years, expects to live to age 95, and makes $2,100 a month after deductions for Social Security, Medicare, union dues, insurance, income tax and anything else that might come out of that paycheck.† The monthly amount she can spend from that paycheck would be $2,100 x 10/30 = $700. ††The remaining $1,400 would have to go into savings to be drawn †a little bit at a time over the rest of your retirement.
This very simple calculation assumes that the retiree will get a raise equal to inflation each year and be able to get an after-tax return on investment equal to inflation and will want to maintain the same real-dollar-spending amount the rest of the retireeís life.† So, if the retiree would get a 3% raise and have 3% inflation and return, the next year she could spend $700 x 1.03 = $721 per month, but save the rest.
Want to extend a simple calculation to make an estimate of your total spending budget?
Add the monthly amount of Social Security less deductions for Medicare and income taxes to your retirement spending from work as calculated above.† Most people do not realize how large the deduction for Medicare Parts B and D will be until they get their first Social Security payment.
Also add the amount that you can get from retirement savings less some reserve for emergencies.† Letís say thatís left after subtracting reserves is $300,000.† Divide that by the number of years you will live in retirement, say 30.† That would add $10,000 a year or $10,000 / 12 = $833 per month.† This also assumes that you will increase the spending by inflation each year and get a return equal to inflation.
Getting a pension?† This is the trickiest thing of all to incorporate because employers offer different kinds of pensions and express the result sometimes in future dollars and sometimes in todayís dollar values.† Further, you will get a lesser amount when the time comes if you are married, and Uncle Sam will take his cut.
DO NOT BELIEVE THAT YOU CAN SIMPLY ADD YOUR PENSION INCOME TO YOUR SOCIAL SECURITY CHECK AS MANY WRITERS SUGGEST AND EVEN MANY RETIREMENT PROGRAMS ASSUME.
The first thing you will want to get from your employer is the monthly amount you will get in todayís dollar values considering the percentage you want your surviving spouse to get of your pensionóusually a choice between 50%, 75% and 100%, the latter providing the least pension amount. Then you want to know if it will be inflation adjusted each year, that is, has a COLA (Cost Of Living Adjustment.)† If it has, subtract any taxes and insurance deductions and THEN add the result to the net of your Social Security payment.†
If your employer says that there will NOT be a COLA, then multiply the net amount you would get from the pension calculation above by 2/3, because a fixed pension is only worth about 2/3 of a COLA pension with 3% inflation.
Do this calculation every year using your latest numbers and estimate of how long you will still work in retirement.
Better yet, use a computer program to do this analysis.† There is a good free retirement planner on www.analyzenow.com.† Itís important, particularly before telling your boss you are going to retire, to see a professional planner with a CFP degree and get a detailed analysis and commentary on the numbers you calculated above.† He may not like the assumption that your retirement return will be the same as inflation.† Nevertheless, real live people with real emotions, who watch what is happening in the stock market and pay taxes, fees and mutual fund costs, have difficulty earning more than inflation.
Henry K. (Bud) Hebeler