Inflation-Adjusted Retirement Planning
There should be a healthy tension between enjoying your life now, during your working years, and enjoying your retirement. Your disposable income (income remaining after paying essentials) during your work life should be balanced between savings and spending so that you can maintain a fairly steady quality-of-life throughout your lifespan - from work life through retired life. For most of us, our current (pre-retirement) quality-of-life is the best we can plan for, and hoping to live better in retirement than in our working life is not a realistic goal. There are exceptions, such as CEO's of large companies "retiring" on a golden parachute, but most of us will be struggling to live as well in retirement as we did in our work life. That said, however, you can adjust your retirement date to make your retirement income lean (retire early) or fat (retire late).
On the linked pages in the table below, we develop the retirement scenario on the basis that your retirement income "need" will be based on your quality-of-life today. We assume here, of course, that you are enjoying your life at your present income level. As a rough rule-of-thumb, your post-retirement income need will range between 50% to 80% of your pre-retirement income. We want to identify the following pre- and post-retirement expenses:
Using the above categories as a guide, the next step is to make an annualized tabular list of all your present work-life expenses, and from that derive an annualized tabular list of all your retirement expenses. These list should be detailed, and you should leave nothing out. But bear in mind that there is a difference between needs and wants, and that in real life we adjust our wants to our financial circumstances by deferring, cutting back or temporarily eliminating those expenditures that exceed our available income -- that are really optional, such as weekend road trips or outings on the lake, nightclubs, a second vehicle, eating out in restaurants, entertaining in our home, travel and vacations (where we go and how much we spend), and so forth.
The link below provides example annualized tables in Microsoft Excel which may help you build your personal estimate. Just copy the file to your PC, or extract the tables into a spreadsheet, and substitute in your own data for the example data.
Once you determine your total annual retirement income requirement, RT, you will need to subtract retirement income supplied by Social Security, RSS, and subtract any other inflation-adjusted income, RM, such as Military Retirement payments, that you might receive in retirement. The remainder, RO, is the supplemental inflation-adjusted retirement income your supplemental savings and investment plan has to furnish, in today's dollars. The equation is as follows:
RO = RT - RSS - RM
See the section on Social Security to determine your Social Security retirement benefit in today's dollars. To determine your Military Retirement benefit (if any) in today's dollars, see your Military Personnel Office. Bear in mind that any retirement benefits from other federal sources, such as the Civil Service Retirement System, may proportionately reduce your Social Security retirement benefits. However, US Military Retirement benefits will not affect Social Security retirement benefits, if you have both.
©2008, Simon Revere Mouer III
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