How Much is Enough to Retire? and a Plan to Acquire It: Thinking About Retirement, #3

By Mel Clark

"How Much is Enough to Retire?" helps you find your "right" answer to this important question.

If you're thinking about retiring, even in some distant future, you need this book.

"How Much…" will help you figure out the retirement income you'll need. When you know what you'll need, you can stack it up against sources such as Social Security, Pensions, and Annuities.

Then, you can determine how much to save to make up the difference.

The book explains two methods of estimating retirement income. Both are better than common rules of thumb.

It'll also help you develop a personal savings plan to get you to "your number".

• Language: English
• Publisher: Clear Thinking LLC
• Release date: Jan 8, 2019
• ISBN: 9781386828563

Mel Clark

Mel Clark writes about personal finance, retirement planning, and martial arts. His blue-collar union family parents raised him and his two sisters in a wonderful environment for children. However, the family was always in debt, always making payments, and never saving. As a result, Mel feels called to share hard-won money lessons with working folks. He wants them to understand they can benefit from saving and investing. They don’t have to be rich to achieve financial independence. He and his lovely wife Linda live near Virginia’s Blue Ridge Parkway. They enjoy ballroom dancing, the occasional camping trip and a silly game called Bananagrams. Mel is graduate of the United States Military Academy at West Point and the Darden School of Business at the University of Virginia.

Book preview

The Top Down Retirement Income Estimating Method

How much are you saving for retirement?

Maybe retirement is so far away it seems fantastic. You know you should save more. But how much?

You want to find the right balance. You have to save for the future. But you need to live now.

There are bills to pay, children to raise. You have a mortgage. How much can you afford to save?

You want to save enough. But not more than enough.

How much is enough?

How can you be confident in an estimate of some distant, unknown future?

Can the Top Down method give me the answers?

Yes.

It can get you close enough. Close enough to make a decent plan. A plan you can change as retirement becomes clearer.

An estimate is a forecast. We know one thing about a forecast - it’s wrong. Always.

The objective of the Top Down method is to estimate the retirement income you’ll need. To estimate it close enough to create a useful savings plan.

You need to create a savings plan that puts you on a course toward the right objective. One that’s good enough to modify many times without collapsing.

You want to develop a simple plan using only the information available now and a few basic assumptions.

You can do this. You have the basic information.

Required Information

First, you need to know your current income from all sources before taxes (Total Income). This is the primary bit of information required for the Top Down estimate.

Second, you need to know your current savings (Accumulation Savings). It includes retirement savings and savings for children (college, weddings or child-related savings purpose). It doesn’t include savings for your Emergency Fund, or for special near-term needs - like saving for a new car.

Third, calculate your current or recent income tax rate (Current Total Tax Rate) combining federal income taxes, federal Social Security and Medicare payroll taxes, and state income taxes.

Fourth, do a little research. Find out your projected benefits from Social Security and employer-based or annuity-based pensions.

Assumptions

First, what will the average inflation rate be between now and your retirement date (Inflation)?

Who knows? No one.

The historical long-term inflation rate in the United States is about 3%. In recent years, it’s been closer to 1.5%. Of course, since 3% is the average, in some years inflation was much higher.

So, what should you use? I’d use 3% and plan on future course corrections to keep my plan on track.

Second, what’s your realistic potential for promotions and salary increases (Salary Growth)? The long-term average for most people is about 1% above the inflation rate. So, if you use a 3% inflation rate, the long-term average rate of salary increase would be 4%.

If you get promoted faster - wonderful! You’ll be able to painlessly adjust your plan upward.

If you’re promoted more slowly, your retirement savings will be higher than you actually need. That’s not such a bad outcome, at least for your retirement planning.

Third, assume you won’t work for pay after you retire. Plan for your income to come from non-work sources.

This doesn’t mean you won’t earn money after you retire. Only that you won’t depend on it. You want a retirement income that allows work to be optional, not necessary.

Fourth, when do you think you’ll retire? Pick a date. Actually, pick several dates.

Since a spreadsheet does the calculations you can change assumptions and see estimates for a variety of retirement dates at the same time.

Fifth, what will the long-term growth rate of your investments be?

Again, who knows? No one.

The spreadsheet provides a default value based on the assumed inflation rate and the assumed rate of economic growth. Accept the default values or over-write them with your own judgments.

Calculating the Top Down