I’ve been helping people plan for and navigate retirement for over 20 years. Along the way I’ve learned some “real world” retirement techniques and I’m routinely amazed at how often the typical retirement advice column online or in a magazine just misses the market.
Unfortunately, some of the information out there, even on retirement planning or investment company websites, is just downright confusing so I thought I’d point out two easy, almost intuitive, tips.
First, the big question: How much will I need to retire? Well my retirement planning process is straightforward. Forget about the percentage of your salary figures so often tossed around online. For most people their “salary” is a fairly opaque number. Before a salary becomes a paycheck, it is taxed for income taxes and payroll taxes, it usually has retirement plan contributions withheld, it often has health insurance expenses removed and sometimes is diverted to pay for supplemental insurance benefits or even to a savings account.
So instead of talking about this topic as a percentage of salary I say let’s talk about it in terms of net paycheck. If we break this topic down to paycheck terms, then the percentage needed is easy. In my experience 100 percent of a family’s net paycheck before retirement will need to be replaced during retirement.
Now there are exceptions, if the family has a large non-retirement savings or investment portfolio which was accumulated by them saving money over time, then perhaps the family is actually living below their paycheck means and income can be lowered during retirement. On the other side of the coin however, if the family has large persistent (over $5,000) credit card balances or a persistent home equity line of credit balance, the habits that led to these balances must be explored and either the habits or the retirement income needs to be adjusted accordingly.
The second confusing, and in my opinion misconceived, retirement topic is inflation. Is inflation real? Of course it is, but it has also been very low for two decades, and more importantly in my experience does not impact retirees in ways anywhere close to how the retirement planning websites and articles portend.
Yes, food, fuel and entertainment gets more expensive over time. For most families, however, the larger household expenses tend to be in the housing and transportation columns, and these expenses are experienced in a way that is unique for many retirees.
In the housing column, mortgage payments are obviously the largest component of cost. For retirees however, mortgage balances are often being paid off, which actually reduces retirement income needs, and even for those retirees that choose to maintain a mortgage or buy a retirement home, often times after the accumulated equity in existing homes is harnessed and when mortgages are restructured mortgage payments often go down.
A similar effect applies to transportation. Retirees tend to drive less and their vehicles in turn tend to last longer. So expenses in this column also tend to trend lower during retirement. With these two larger expense items exposed less to inflation, retiree expenses go up much slower or can even go down over time.