If everything goes right, most of us will retire once, maybe twice, during our entire lifetime. This, of course, creates a justifiable level of anxiety and uncertainty surrounding the retirement process.
I've been observing how families prepare for retirement for a long time, and there are a few concepts learned along the way that apply to almost every retirement situation.
First, retirement is about cash flow. It is vital to understand the sources of cash flow available as well as how these various forms of income will be taxed. There have been many "guidelines" regarding retirement income targets. Some say 70 percent of pre-retirement income, some say 80 percent.
I say the best measuring stick is your paycheck. In my experience a household will need to replace 100 percent of its pre-retirement net paycheck in retirement. A net paycheck is the amount deposited in the bank account after taxes, after 401(k) or retirement plan contributions, after insurance costs and after every other expense reducing gross earnings.
For example, someone earning $80,000 who contributes 10 percent of their pay to their employer retirement plan will bring home roughly $4,200 per month. In my experience for a retirement to be successful this whole $4,200 will need to be replaced by other income sources.
An exception to this rule could be if a family has accrued some sort of sizable (above two months of income) consumer or second mortgage debt. This may indicate the family is living above their paycheck and the source of the debt needs to be explored and understood.
On the other side of the coin, if the family has accumulated a substantial level of non-retirement savings or investments (more than six months of income) this may indicate the family is living frugally and retirement income targets may be adjusted lower. These signs withstanding, however, in my experience most families can comfortably use 100 percent of their net paycheck as a solid target.
Successful retirees are also able to stick to a well conceived income plan and do not destabilize their retirement accounts by making repeated large and inconsistent withdrawals. This may mean getting a new car or taking the big trip right while your still working. It may also mean working hard to accumulate a non-retirement emergency fund of three to six months income before retirement.
One more tip, successful retirees are open-minded investors. Investing in retirement is different from investing solely for accumulation. Retirees need to consider their options, explore new financial products and strategies and maintain an appropriate level of liquidity and investment risk. Retirees don't necessarily need to give up their long-term investment horizon, but taking to little or to much risk can have serious consequences when your income is dependent largely on your assets for the rest of your life.