Plan Now to Retire Worry-Free
Kiplinger's Personal Finance|February 2020
Are you saving enough for retirement? Our 10 steps will help you finance the lifestyle you’ve always wanted.
Sandra Block

As you approach retirement, it’s easy to become fixated on the magic number—a pot of money large enough to allow you to retire comfortably without outliving your savings. But figuring out whether you can afford to retire requires math, not magic, along with a thoughtful analysis of how you plan to spend your time and money. On the following pages, we’ll help you come up with a realistic estimate of how much money you’ll need to retire in style. // Plenty of online calculators will help you figure out whether you can afford to retire based on the amount of money you’ll need to replace a specific percentage your current income. A popular rule of thumb, for example, suggests that you should plan on replacing 70% of what you currently make, or 80% if you want to live large. But this guideline is deeply flawed, financial planners say. During their early years in retirement, many retirees end up spending as much as or more than they did when they were working, says Jennipher Lommen, a certified financial planner in Santa Cruz, Calif. // However, if you were to move to a lower-cost area, say, or stop supporting adult children, your living expenses could drop in retirement. When you retire matters, too: If you retire before age 65, for example, you’ll need to figure out how to pay for health care before you’re eligible for Medicare.

To come up with your own magic number, you need to figure out how much you’ll actually spend in retirement, which means coming up with a comprehensive retirement budget. Only then can you determine whether your savings and other sources of income are sufficient to finance the lifestyle you’ve envisioned.

You’ll also need to estimate how long your money will need to last. You may have heard of the 4% rule, which is considered a safe withdrawal rate for a 30-year retirement that might include a bear market and periods of high inflation. Under this rule, you withdraw 4% from a diversified portfolio in the first year of retirement and adjust the amount annually by the previous year’s rate of inflation. For example, with a $1 million portfolio, your first year’s withdrawal would be $40,000 (see “Harvest the Fruits of Your Savings,” Oct.).

But this strategy won’t help you much if a 4% withdrawal rate won’t cover your living expenses. Once you’ve worked out your retirement budget, you can determine whether a 4% withdrawal rate—combined with other sources of income, such as Social Security and a pension, if you have one—will be sufficient to pay the bills. If not, you may need to save more, work a few more years, or both.

That’s a sobering thought, but this exercise can also be liberating. You may determine that a 4% withdrawal rate will provide more than enough money for a comfortable retirement, with some left over for your heirs. Several studies have shown that many retirees are so worried about running out of money that they’re unwilling to spend their savings, even if they’ve accumulated a substantial nest egg.

“When we all started talking about what people would do with their 401(k) balances, the initial thought was that they would take a trip around the world,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. Instead, many are “paralyzed and don’t feel comfortable taking money out of their accounts,” she says.

Here’s how to break out of this inertia. You may find that you can afford to book that dream cruise after all.

1. Figure out how much you’re spending now

You may have a vague idea of how much you’re spending based on how much is left over from your paycheck every month. But do you really know how much of your paycheck goes toward groceries, gas, movies and all of life’s other necessities and nonnecessities? Now is the time to get a handle on the cost of your lifestyle. Comb through your credit card and bank statements and track all of your expenses for the past three to six months. Don’t overlook expenses that occur quarterly or biannually, such as property taxes. You can enlist tools such as Mint.com to get a breakdown of spending categories; some credit and debit card providers will also categorize your expenses for you. Review your pay stubs to plug in the amount you pay for health insurance premiums, retirement savings, and state and local taxes. The more specific you can be, the better. Ian Rea, a certified financial planner in Medfield, Mass., asks clients who are preretirees to fill out a 50-line spreadsheet that covers everything from life insurance premiums to pet care. Use a software program, spreadsheet or worksheet such as the one on page 51 to list your expenses.

2. Back out expenses that will decline or disappear

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