In our first installment of this series, we approached the question of "how much do you need to save for retirement?" by considering how much money you would need to accumulate in your savings or retirement accounts to effectively replace your annual income after you retire. In this installment, we're going to focus instead on how much you plan to spend each year after you've stopped working to identify your lifetime savings target.
That's an important difference to consider, because if you have developed the kind of frugal and thrifty habits it takes to build a comfortable nest egg where your personal spending is concerned, the odds are that the answer to the question will be much smaller, and much more realistically attainable, than the answer that would belong to someone who lives a less financially disciplined life.
Here, we'll start with the amount of money that you want to spend each year in retirement and figure out how much you would need to save after taking the monthly retirement benefits you might get from Social Security into account (you can find out that number directly from Social Security), which will give us the minimum savings target you will need for your savings and retirement accounts. We'll be applying the simple math that lies behind the Four Percent Rule to find that number, where our tool below will let you set the percentage of money that you would seek to withdraw from your retirement account each year if you would prefer to be more conservative, as some advisers recommend.
We'll also consider something that a lot of retirement advisers haven't yet been taking into account for their clients - what will happen when those benefits are cut as promised under current law by 23-27% after the year 2033 when Social Security's Trust Fund is projected to run out of money, which is just 15 years away at this writing.
The fun starts with our tool below, where you're more than welcome to change any of the default values we've entered to consider whatever retirement spending scenario you would like to consider! [If you're accessing this article on a site that republishes our RSS news feed, please click here to access a working version of the tool.]
In case you're wondering about the default data, $45,786 is the average amount of annual household expenditures for Americans Age 65 or older in 2016, which comes from the U.S. Bureau of Labor Statistics and U.S. Census Bureau's annual Consumer Expenditure Survey. Data for 2017 will become available in September 2018.
To find out if you're on track to hit your personal retirement savings target indicated by our tool, assuming that you've found the results from our tool to be reasonable for your retirement planning scenario, please take advantage of the tool we provided with our first installment.
Perhaps the biggest wild card in our tool's results to consider is what will happen to Social Security after the trust fund that is currently boosting the retirement benefits that it is paying out by about 20-25% runs out of money and it switches back to a pay-out-only-what-it-takes-in type program. It's possible that politicians will strike a deal to keep those payments from being cut, which would more likely than not mean higher payroll taxes.
Alternatively, they could continue doing what they started doing under President Obama and begin cutting Social Security "loopholes" benefits in small installments to more sustainable levels for the government. [Note: We put "loopholes" in quotes because that's how the politicians described cutting the Social Security benefits that earlier politicians had specifically set up to work exactly as they were used by Social Security beneficiaries. Funny how that works!]
Otherwise, big Social Security benefit cuts will arrive all at once, as soon as Social Security's Old Age and Survivors Insurance Trust Fund runs out of cash.
Finally, if you're looking for ways to cut your expenses after retirement that involve little in the way of sacrificing your quality of life, Paul Katzeff of Investor's Business Daily has four suggestions.
Labels: investing, personal finance, tool
Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:
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