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If you’ve read even three how-to-retire articles in the last decade, you’ve seen the percent-of-salary argument. It goes something like this: you need “x%” of your current salary to retire. Usually that number is 80%, and then the article proceeds to argue why that isn’t right and how you can, basically, never retire.
So, what do I have to say differently about the subject? Well, it depends—it depends on who you are, what your current level of spending is, what your current expense picture looks like. Like all real life financial planning, it’s a highly individualized process that has to take into account an awful lot of variables. But let me give you a dozen considerations so you have some new things to worry about late at night:
1. Are you currently a saver or a spender?
If you are spending everything you make, you’re probably going to need 100% of your current income in retirement. On the other hand, if you’re already saving at least 20% of your income, maxing out your 401(k) or SEP, or have a ton of unspent cash in your savings account, you can subtract that percentage from your future needs—it’s going to be a hard habit for you to break, but you really can ease up on the saving. This IS what you’ve been saving for!
2. How much do you spend on work related expenses?
Do you drive downtown every day and pay for parking? Are you in Armani? Do you eat every lunch out and stop at Starbucks on the way in? Are you entertaining clients on a regular basis? Most of this you can cut back on in retirement. Figure out what you spend as a proportion of your income, and subtract that from your retirement needs.
On the other hand, if you already work at home, or go to work in jeans and brown bag it, or take the bus, you’re not going to save anything in this category in retirement. So, back up to 100%.
3. How many cars are you supporting?
Each car you live without saves you thousands—both in repairs and maintenance, and in insurance, capital for future purchases, or lease/loan payments. Try out this calculator to see what it’s really costing you. Again, figure any reductions as a percentage of your yearly income and subtract from your 100%.
4. How many people are you supporting?
Any chance your kids might move back in with you (or are still there)? Is there anyone in your family with disabilities that might make them dependent on you? Elderly parents? Based on my own experience, you might be amazed at how much it can cost you to eat at a hospital for weeks (when you’re the caretaker). Or hire a “medicar” to get your elderly parent to the doctor. Or how much the grocery and electricity bills can go up when the kids move back.
5. How’s your health?
Probably fine right now, but that can change big time in the blink of an eye. Whatever you’ve calculated as your potential retirement income (investment withdrawal, Social Security, pensions), is it enough to support $250 a day (that’s $7,500 per month) for, say, 4-7 years at a nursing home? Add maybe another $1,000 per month for “extras” that aren’t included in the nursing home fee, and aren’t paid by insurance. Think you’ll stay home instead? If you need round-the-clock care, it’s even more expensive, which is the secret to why a lot of people ultimately choose nursing homes. At least in the Chicago area, that $250/day isn’t even the nicest nursing homes. If your nest egg for retirement is less than $2 million, you must consider long term care insurance. And maybe start an HSA savings account, if you’re eligible, to pay for the donut hole in drug coverage. Retirement planning, and the amounts needed, must take into account the need for breathtakingly expensive long term care, and the burden of caring for you that loved ones might undertake. And you thought college was expensive!
6. How much debt will you have?
Is your house paid off? Whether it should be is a tough question that I’ll take up in other blog posts. If you go into retirement with a house payment, though, you’ll require enough income to continue to make the payment. If you rent, you’re going to need to plan that that cost will go up over time.
7. Have you figured in inflation?
If you’ve paid off the mortgage, do you have sufficient investment cash to continue the likely escalation in property taxes, utilities and a fund for major home repairs? For example, if you’re retired for 30 years, you’re probably going to need to reroof at some point during that period. A rule of thumb I’ve seen is to budget 1% of the value of your house for home repairs every year. In my case, it’s been at least that much and in some years, much more. But take 1% of your house’s value, and add it to your retirement budget—otherwise, a re-roof or a new driveway can be a budget buster that requires you to break into your retirement principal or skip a lot of vacations.
8. How much do you do yourself?
Cleaning service? Landscaper? Even if you think you might handle some of this in retirement, your health may not allow it at some point. Try to make a guess at these costs.
9. How cutting edge are you?
Are you first with the newest or are you still driving a coal-fired computer? How early you buy and how quickly you discard can adjust your number up or down, particularly if you change your habits in retirement (in either direction).
10. How much do you want to gift?
Taking a couple of grandkids to lunch and the ballet, or a week in Disneyland, or buying a new set of tires for a child who’s broke can quickly add up (thanks, Mom & Dad). If you’re anywhere near affluent enough to consider doing these things, you’re going to do them. Make them part of your budget.
11. Do you belong to an organization or a church?
Will your donations be time and effort or cash? Generous cash givers may want to adjust donations down in retirement, giving time instead, or adjust up, if supporting an organization is one of the goals you’d always planned for in retirement. Also, I’ve found as I get older that neediness tugs at my heart strings even harder than when I was in my twenties.
12. Do you plan to move?
To a cheaper place? A different area? Can you wait out the market to sell your house? Have you calculated closing costs, travel to a new location, the possibility of rental costs between purchases, or the cost of packing and moving itself?
So now, is it 80%? or 50%? or 100%? Thinking maybe you’ll work a little longer?
