The second and more rigorous approach requires more work, but should result in a plan more tailored to your personal situation and lifestyle.
Start by preparing a cash flow statement that identifies your current spending and then adjust for expenses you anticipate will change when you enter into and transition through retirement. Because it is impossible to estimate with accuracy many future expenses including health care costs, use your best estimates and avoid getting caught up in the details.
Whichever approach you use, be sure to account for inflation and taxes. Inflation presents one of the greatest threats to a retiree’s lifestyle because it significantly reduces their purchasing power over time. If $50,000 provides a comfortable retirement today, assuming an annual inflation rate of 3%, you’ll need over $67,000 in just 10 years to maintain the same lifestyle.
While your taxes may decrease once you stop working, they will still consume a portion of your income and investments. If you need $50,000 to pay your bills and you estimate your tax rate (federal and local) at 25 percent, you’ll need to earn over $66,000 from your retirement income and investments.
Being able to retire on your own terms is a dream for most Americans. This first step to turning that dream into a reality requires just a little of your time and a few calculations. You will find it is worth the effort.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.