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Estimating Your Retirement Income Needs

Retirement may be decades away, but it's never too early to start planning. Where do you begin?

Start by estimating how much income you'll need to fund your retirement. That's not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.

Use your current income as a starting point

It's common to discuss desired annual retirement income as a percentage of your current income (which could be anywhere from 60% to 90% or even more of your current income). The appeal of this approach lies in its simplicity, and the fact that there's a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle.

By taking that income and reducing it by a specific percentage to reflect the fact that there will be expenses you'll no longer be paying (such as payroll taxes), ideally, it will allow you to sustain your current lifestyle. The problem with this approach is it doesn't account for new expenses that you may incur once you’re retired, such as rising health care costs.

Project your retirement expenses

Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. Estimating those expenses is a big piece of the planning puzzle.

Don't forget cost of living will go up over time.

“When it comes to projecting retirement income, we recommend dividing your expenses into two categories—needs and wants,” said Ted Rubin, Vice President, SELCO Investment & Retirement Services, available through CUSO Financial Services, LP (CFS)*. “The first category contains essentials, or ‘needs,’ like food, health care, and housing. The second category is discretionary expenses, or ‘wants,’ such as entertainment, travel, or hobbies.”

In addition to estimating current and projected expenses, don't forget cost of living will go up over time. Your retirement expenses may also change from year to year. For example, you may pay off your mortgage or your children's education early in retirement. Have a financial professional like a CFS advisor at SELCO Investment & Retirement Services help you with your estimates to make sure they're accurate and realistic.

Decide when you'll retire

The longer your retirement, the more income you'll need. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement (because you started early and saved smart). Although it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 will cost you a lot more than retiring at 65.

Estimate your life expectancy

We all hope to live to an old age, but a longer life means that you'll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources.

“Most retirement planning experts recommend that you plan for a longer-than-average retirement,” Rubin said. “For example, we suggest you calculate your life expectancy using an online calculator and adding five to 10 years. Look at your situation as opposed to only using a standardized measure such as government statistics.”

Identify your sources of retirement income

Once you have an idea of your retirement income needs, the next step is to assess how prepared you are to meet them. In other words, what sources of retirement income will be available? Your employer may offer a traditional pension that will pay you monthly benefits, and you can likely count on Social Security to provide a portion of your retirement income.

Additional sources of retirement income may include 401(k), IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest and the rate of investment return, among other factors.

Preparing for potential shortfalls

If you plan accordingly, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you'll come up short? There are steps you can take to bridge the gap, and a financial professional can help you determine the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses so you'll have more money to save for retirement.
  • Shift your assets to investments that have the potential to substantially outpace inflation. But keep in mind, investments that offer higher potential returns may involve greater risk of loss.
  • Work part time during retirement for extra income.
  • Consider delaying your retirement for a few years (or longer).

“Instead of looking for quick-fix solutions, consider reasonable options, such as having a more modest lifestyle, increase your savings gap, and review how much your plan will produce in retirement income and the gap to fund,” Rubin said. “Sometimes, these small changes add up to a large impact.”

There are a lot of factors to consider when determining how much you’ll need to retire comfortably—but you don’t have to figure it out on your own. SELCO Investment and Retirement Services can help you manage your retirement plans and prepare you for the next stage in your life.


* Nondeposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Nondeposit investment products offered through CFS are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. SELCO Community Credit Union has contracted with CFS to make nondeposit investment products and services available to credit union members.

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