Create An Income Plan, Not A Savings Goal

A simplified approach to retirement planning revolves around projecting your expenses, and then multiplying that amount by 20-25 years to come up with a savings goal. The first part is fine, and well advised, but the second part is lacking. Even if you could figure out the optimal amount (isn't predicting the future always the trickiest part?), is running out of money in your 90th year your true objective? Of course you want to be able to pay your bills without worrying, but how will you feel watching your balance get closer and closer to $0 every year, and not knowing if you planned for enough cushion for life's inevitable curve balls? Math is math, but how you will feel about watching your balances decline during all those years of retirement is what so few really pay attention to. You spend 40 years saving, and around half as much time spending it. It can be hard to let go. Not to mention that you may want to leave some money to family members, charity, or other worthy causes. Did you add that into your itemized expenses?

Rather than saving just to satisfy your expenses, perhaps another way to think about this issue is how much income you will need to feel truly comfortable throughout your retirement? It's not about replacing a set percent of your pre-retirement income, it's about knowing that your savings will generate a reliable income amount each year. What amount would you need to really sleep well at night even if (especially if) things don't go according to plan? Maybe you want to try to preserve all of your principal, or maybe you're okay with spending a good portion of it during retirement. Those are individual decisions, but it's the income your savings will generate that will make you feel comfortable and secure. That's one reason why annuities are popular - they guarantee you a certain income. But you don't need to pay a huge fee for that, you can create your own annuity. How much income will it take, whether it pays all of your bills or just some (using savings, other income sources, and/or Social Security for the rest), to really relax in every year of retirement? And how much money, if any, do you want there to be left when you reach your 90th birthday (or however long you may live)? Those are the real goals. Life can always be counted on to throw you a curve ball (or two, or three...) so do your best to prepare for it both financially and mentally so that you can emerge unscathed. Plan for an income goal that makes you feel comfortable, not just a savings goal to cover your expenses. It's not the same thing.

Below is an example of the savings needed to generate a specific income. To see more details, including how long it will take you to reach these goals, try our "Years To Income Goal" calculator.

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