It’s important to calculate your lifetime retirement paycheck before you say goodbye to the working world, since it’s what you’re going to “make” for the remainder of your life. It’s not your cash warchest for the whole of your retirement; it’s what you’re going to be withdrawing on a regular basis. You’ll probably have some extra cash tucked away in an emergency fund as well, but that money needs to be left for its purpose – emergencies. Your retirement paycheck will determine your budget for living expenses.
Take Inventory Of Your Retirement Assets
Your lifetime retirement paycheck is a function of your overall retirement assets, including sources that are obviously earmarked for retirement (e.g. pensions, 401(k)s, IRAs, and any other retirement savings accounts). But don’t stop there. Take into account all of your assets and how they might change during retirement. Are you going to sell your house? How much do you plan to net from that sale, and how much will you need to pay for other housing afterward? Do you have an annuity or other retirement account that’s already earmarked for emergency and medical expenses?
Don’t forget the growth that your retirement accounts will accumulate after you retire. For many people, the yields on their retirement accounts (i.e. what they earn every year) are their lifetime retirement paycheck. Use an investment calculator to find out what you might expect to yield over the course of your retirement.
Decide How To Take Your Pay
You may live off of your yields and leave the principle as an emergency fund, or you may have so much saved up that taking away from the principle doesn’t pose a problem. How you take your pay is something that you’re going to have to figure out before you retire. You’re not married to one method or the other, but if you pick the wrong one, you might be.
The main thing you’re going to need is an emergency fund for health care expenses, which are estimated to be around $220,000 (not including any nursing home care costs) for the average retired couple in America. But you also want to have a big chunk of cash for unforeseen events, just like you do now. Plan for both of those contingencies and you can do basically whatever you want with the rest of your nest egg.
Now comes the time for the rubber to hit the road. Just how much do you plan to spend when you retire? Don’t simply calculate your expenses and stop there. You haven’t worked all these decades not to have a little (OK, a lot) of fun during your retirement. You need to plan for vacations, celebrations, and even legacies. How much do you want to leave to your kids and grandkids? How much do you have to leave to relatives you might be taking care of? All of these expenses need to be included in your budget because they’re going to come out of your lifetime retirement paycheck.
Match Your Numbers
Now it’s time to compare your two numbers. Ideally, your lifetime retirement paycheck should be in excess of your budget. If it’s not, you need to run those numbers again. Maybe you missed something, or maybe you crunched the numbers the wrong way. Crunching them the right way might give you a more pleasing number. The most important thing is for you to be able to support yourself after you’re done working. Few things are going to cramp your retirement style more than running out of money.