Calculating Required Retirement Income

Jan 16, 2013 Comments Off by

Project your retirement expenses based on current or future lifestyle and not on your current income. Most advisers recommend planning a retirement income of 70% of your salary. If one is to live very frugally, then it may be too conservative of a calculation. If you plan to rent or still have a mortgage in retirement, then you need to plan for more income.

This following suggestion is not based on theoretical basis, it is based on my chase to reach financial independence and retirement income.

The answer: double your expenses.

Why double?
Life happens. When I first calculated how much I needed to retire on, I was sure it was based on my planned frugal expenses only. I didn’t know how much discretionary income I really wanted and certainly didn’t plan for life to happen. I can plan for house maintenance, car replacement but life will happen and throw me a curveball. Vacation opportunities come up, travel to visit a sick family member isn’t planned but happens. Investment opportunities come up which I want to be involved in. With all those reasons in mind, this is why I have planned for double my expenses.

Reduce expenses
Pay off your mortgage and all other debts. If you plan on refinancing your house to pay off your spanking new renos, you want to rethink your approach on how long your mortgage will take to be repaid. Having a mortgage or HELOC during your retirement is a hindrance. Many Baby Boomers including some of my family members have fallen into this trap and will have to work longer or retire more frugally. Reduce variable expenses you have control over such as your food budget, utilities, media cost, car. In order to achieve my retirement, I need to pay off my mortgage in 5 years.

Remove expenses no longer used in retirement. You won’t need to spend money on work clothes or transportation to work. Look out for sneaky habits you can’t easily break. A retiree I know still eats out each work day while his wife is at work. This means he spends fuel to drive into town in his nice truck and spends significant money he doesn’t have for a good meal. His justification is it gives him something to do. On top of that, he doesn’t care for leftovers and doesn’t want to learn how to cook. Him and his wife could be saving $5000 pa of after tax money if he dropped this expensive habit.

Control your shopping
It is easy to justify shopping for electronics, clothes or other personal items when living on two big incomes. In order to reach retirement sooner, this entertainment habit needs to stop or be reduced.

Once you budget on how your expenses will be reduced, double the number in order to calculate how much annual income you require.

Debt, Frugality, Lifestyle, Retirement, Savings, Strategy

About the author

Clara Cannes, the chief author from Goldeneer is a Canadian that works as a full time employee in the engineering field. Her passion is real estate, entrepreneurship and sustainability. Clara has finally reached financial independence in her late 20's and is on the path to a comfortable retirement by 35.
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