Thursday, October 8, 2009

Determining "Your Number"

Some retirement planners start out by asking you how much money you think you need to retire comfortably. You can’t possibly answer the question unless you have already done a lot of groundwork to determine a good number. Don’t you dare pick a number at random because it seems right to you! “Gee, a million dollars should do it.” A million dollars ain’t what it used to be, folks. Consider this: If you retire at 65, live until 85, and need an average of $70,000 per year to live comfortably for 20 years – you need $1.4 million. But it’s not really that simple, unless you plan to hide cash under your mattress (not recommended), and don’t have any other assets that will help create an income for you. How can you determine “your number” and end up with a result and a financial goal that makes you comfortable? If you’re following my blog and taking some action, there are some inputs you have at this point that will help. You know how much money it takes for you to live on today. You have a budget and track your spending. You have aligned your spending with your priorities. You have one or more means of saving money for your future. You have an idea of how much income you should expect from Social Security. And you have some idea of what your retired life will look like. Haven’t been doing your homework, eh? Remember, you can’t achieve your goals until you have goals – so get started.

To get to “your number”, you need to project your future expenses – for the rest of your life. This is not impossible – but it will be an educated estimate. Start with the year you hope to retire, and with your current budget as a base. Adjust the inflows (e.g. salary) and outflows (expenses), based on what you know about how you will live after you retire. Start with the big ticket items first: Investment/Retirement Income, Social Security, Housing, Transportation, Medical, Food, Utilities, and TV/Internet/Telephone.

Year over year, there will be some inflation in our expenses. See the fantastic web site maintained by the Bureau of Labor Statistics ( for a goldmine of data that will be helpful in many aspects of your planning. For a history of annual inflation in the Consumer Price Index, go to

Finally, consider how your life may change over time, and account for major changes in your expenses in your timeline for the future. For example, Ron and I picked a year by which we expect to sell our home and move into assisted living together. That creates a temporary leap in liquid assets (from the home sale), and then a heightened, steady depletion of assets for the ongoing expense of assisted living. We expect to buy a new car every 7 years (up until the point we assume we shouldn’t be driving any more).

Creating your projected post-retirement budget is a lot of work. Once you start, it will also be a continued work in progress as the vision of your retired life crystallizes. So get your budget spreadsheet out, copy it to a new tab and start modifying it (with years on the X axis and expense/income categories on the Y axis) to project your future needs.

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