Determine whether you can afford to retire and how much to spend per year
The second step in the retirement process is to determine when to quit. Now, if you go back to our previous article, you know that quitting simply means finding something else to do.
Most of the “retirement” systems in the US were designed for 65 year olds to stop working and live less than ten years. The good news is that we now live to an average of 78.7 years. Men live slightly less and women live slightly longer. Be nice to your wives an daughters. Ok, so if we do the math, social security and retirement plans are designed to last us until we reach age 75 or less. This doesn’t help those of us who live to age 80. 90 year olds better find a second career. How do we combat this?
First, don’t rely solely on social security. Second, don’t quit your job the second you reach age 65. Technology and healthcare are better than it’s ever been. We can work and be productive until age 90 in some cases. Heck, my first boss was still working at age 94. The same goes for our retirement savings. We need to use projections that span to age 90. If you only live to 80, you’ll have a nice cushion.
Determining How Much You Need To Live Each Year
One of the most important things to think about when planning for retirement or actually retiring if how much money you will need to survive each year. Most retirement planning guides will tell you to shoot for an amount between 60-80 percent of the money you spent during your working years. I actually tend to agree with this amount. I find that most retirees are frugal and end up spending around 50 percent of the money they spent before they stopped working. The angst that surrounds spending limits for retirees is one of the things that stops people from enjoying life. Don’t let this be you.
Since we go above and beyond at this website, here are some additional rules for retirement spending:
- Save for retirement based on where you are in life . . .not where you want to be or think you should be
- If you start saving for retirement later, plan on getting a part-time job during retirement to supplement your income. This job should be something you enjoy or that provides benefits to you that a full-time job doesn’t provide.
- Pay off your home before you retire. You don’t want a mortgage once your income decreases. A mortgage is most people’s largest expense per month.
- If you’re married or living off of two social security checks, don’t county both checks as part of your income. Don’t let the death of your partner or spouse wreck your finances.
- Consider income supplementing things like part-time jobs, garage sales, blog writing, consulting, or even providing local services. Apps like thumbtack and next-door allow you find jobs available around you (usually with walking distance)
Annuities or Cash
Should you purchase an annuity to supplement your income or should you stick to cash savings in things like CDs and IRA accounts? First, lets explain what an annuity is.
An annuity is a financial product typically used by investors to save tax-deferred for retirement or to generate regular income payments, helping to replace a paycheck in retirement.
Annuities are insurance contracts whose payments are guaranteed by the company issuing the contract.
Are there different types of annuities?
There are 2 major categories: variable annuities and income annuities.
What’s a variable annuity?
This annuity can help you build a long-term nest egg. It offers:
- Deferred taxes on earnings until withdrawn.
- The ability to receive payments.
- The option to pass assets to beneficiaries.
What’s an income annuity?
An income annuity provides guaranteed income in retirement.
- You trade a portion of your retirement assets in return for guaranteed income, which is based on your lifetime or the lifetimes of you and another person, or for a fixed period of time.
- You have the flexibility to choose how much income you need and when you’d like your income to begin.
Ok, now you know what an annuity is and what the benefits are. What are the downsides?
Many annuities are sold by brokers who collect fat commissions for doing so, with some commissions as high as 10%! If you don’t see a commission fee broken out for you, that doesn’t mean it’s not there.
Many annuities charge annual fees. This is mostly a feature of variable annuities, and is one of the knocks against them. It’s not unheard of to be paying between 2% and 3% per year. This is three times more than I would recommend paying for an investment
Most annuities lock your money in for a set time period. I usually recommend purchasing annuities for a period less than three years. Don’t pay commissions. Do your research first. Vanguard is the place I would go for annuities or investments simply due to their ridiculously low fees.
Alright, so we touched on annuities and spending during retirement. You’re all experts. Stay tuned for our next article on retirement!
Stay rational
-B&T