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How To Calculate Your Future Retirement Income

Figuring out how much income you’ll need for retirement can be one of the biggest challenges in financial planning. This is especially true if your retirement is still 20 or 30 years away.

So what’s a good way to estimate how much income you’ll need in retirement?

For those whose retirement is at least a couple of decades away, my advice to you is to just keep saving as much as you can, and let that long time horizon work for you. There are just too many variables at this point for you.  But if you’ve got 10 years or less, figuring an income estimate is a bit easier.

How much will you spend each month (or year)?

The first thing we want to do is calculate roughly how much you’ll want to spend each month or each year, including an estimate of any taxes you think you might have to pay. A good starting point here might be to just use your total current monthly net income from your job. If that amount works well for you now, then it may work just as well in retirement.

What are you spending money on?

Then we need to look at what you’re spending that money on. Where does it go? Of course, some expenditures will likely go away once you’re retired, but other new expenses will probably take their place. So they won’t all be exactly the same, but they could be close. Also look at how long certain expenses will continue? Will your mortgage be paid on in the not-to-distant future? Are there any other current expenses that might not continue for the rest of your lives?

What are your sources of guaranteed income?

The next thing we want to do is look at any sources of guaranteed income you’ll have once you’re retired, and when you might expect to receive them. These income sources include Social Security, pensions, and any annuity payments you may have: all of which provide us with a good foundation of what we know will be coming in. The more guaranteed income you have, of course, the less your portfolio will need to provide for you.  So make sure you know where those guarantees are coming from.

Where’s the gap?

At that point, we’ll know what the gap is between what you’re estimating you’ll need to spend, and how many of those necessary expenditures will be covered by your guaranteed income. Some people will have enough in Social Security and pensions to cover all of their necessary retirement spending needs. Others may fall short, and will need help from their portfolios to make up the difference.

So if you’ve estimated, say, $70,000 of yearly retirement expenses and you have $40,000 of guaranteed income, your shortfall is $30,000 per year. That’s what we would call your “gap number” –  how much your savings and investments will need to provide for you every year.

Now take that gap number and figure out if your portfolio can adequately sustain that amount for at least 30 years. If you need 30 grand from your savings each year and you expect to have at least $600,000 or so saved by the time you retire, that amount may be workable if we stick with a 4% – 5% guideline on the withdrawal rate. If you’ll have less than that, we’ll probably have to make some adjustments to either your spending needs or to your current ongoing savings plan.

This illustration is, of course, a much-simplified version of what we would do to estimate your retirement income needs. We didn’t take into account investment returns and fees, future interest rates, or inflation.  Each of those will factor in as well. But it should at least give you an idea of what you’ll need from an income standpoint which also might give you a better idea of when you’ll be able to hang it all up.  Hey, who knows – maybe you can retire sooner than you thought!

This is the type of financial planning that we do every single day at Lucia Capital Group, so if you want to work up an income and withdrawal strategy for yourself, just give us a call – we’re here to help!

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Annuities are long-term investment products designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer subject to their terms and conditions. Early withdrawals may be subject to surrender penalties and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Annuities are not FDIC insured. Certain terms and conditions apply, so please read insurance company materials carefully.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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