Mar 20, 2009

Post-Retirement Income (Part 2): Finding Your Figure

Okay, as discussed in Part 1 of this series, if the 80% rule is nonsense, how can you arrive at a reliable dollar figure for the amount of current income you'll need to replace after retirement?

Start with what you know rather than guesstimates about the future, which, like most fantasies, are unlikely to have much of a relationship to reality anyway. Ask yourself: How is my financial health today? If you're currently living within your income and possibly saving a little to boot, you have a good start for estimating how much income you'll need to maintain a similar lifestyle after retirement.

Now it's time to subtract the current expenses that will diminish or disappear later. In Part 1 of this exercise, I pointed out that for many people who no longer need to pay a mortgage or bear the costs of raising children, they'll enjoy the largest post-retirement savings, together often netting at least 40% -- and often more.

And, unless you're a shopaholic for whom more free time necessarily means more spending, there are a whole host of other possible savings. The most obvious are related to the job you no longer need to perform -- for many people, the top of the list is the cost of commuting, followed by work-related clothing and food. For example, a woman who drives 20 miles to work, maintains a wardrobe of business-appropriate clothes, and buys lunch and coffee now and then can easily save five thousand dollars per year simply by staying home!

Many other potential post-retirement savings fit into what I call the "time is money" category. The equation is simple: The more free time you have, the easier it is to maintain an equivalent lifestyle at a lower cost. For example, instead of patronizing the pricey but convenient corner store, you'll have plenty of time for a once-weekly trip to Costco. And when it comes to taking a vacation, you'll now be able to travel at off-peak times, taking advantage of significant savings in transportation and lodging.

But what about the so-called retirement experts who, to quote the Associated Press reporter Dave Carpenter in his recent article "Retirement: Test Your Financial Planning IQ", say that "people tend to spend more money when they have more time." Perhaps, if we remember that these are the same retirement experts, for the most part, who recommended buying mutual funds when the DOW was over 13,000, we can put their "you can never save enough" advice into perspective.

Finally, don't forget the savings you'll achieve by taking advantage of senior discounts. For example, an excellent public golf course near me lets seniors play as much as they want on weekdays for $80 per month. And the local rapid transit systems discount senior fares by up to 70%. And then, of course, there are America's national parks which offer free admission to those over 60.

But what about medical costs and other things that may be more costly after you retire? Medicare will cover most of these costs, but especially if you have or develop a chronic illness, you'll be out of pocket some cash, either by paying for a medi-gap insurance policy or directly for uncovered fees and drugs. If you are reasonably healthy and do the kinds of things necessary to stay that way, you might sensibly guess that adding back a few thousand dollars per year makes sense. And, for anyone who feels the need to be more precise, I recommend Social Security, Medicare & Government Pensions, by Joseph Matthews (Nolo), which will provide the tools you need to make a far more accurate estimate.

In Part 3 of this series, I'll discuss the final big piece of your retirement spending conundrum: how your spending patterns will change as you age.