Recently, two articles were published two days apart with two opposing perspectives on retirement planning. One from the Los Angeles Times was entitled, “Most U.S. workers unprepared to meet retirement expenses, survey says.” The other article, from NBCNews.com, was entitled, “That retirement crisis? Not so bad after all.”
So which is it? Are things looking bleak, or is everything okay?
This is why I stay away from retirement generalizations, choosing instead to focus on my own family and our own personal financial situation.
Ignoring magic numbers and “one-size fits all” formulas
I don’t like those magic retirement numbers that say I’ll need so many millions or 8 times my current salary saved for retirement or that we can draw down 4 percent of our retirement savings each year. How do they know?
While examples using such generalizations are fine, in my opinion they shouldn’t be used as across the board statements regarding large swaths of the population since retirement situations can vary vastly from person to person. What if my annual income is only $20,000? Using the rule of eight, does that mean I’ll only need $160,000 in retirement? A CNBC.com article reports that the average spent on health-related costs not covered by Medicare is about $135,500 according to 2012 data from the Employee Benefit Research Institute. And drawing down 4 percent a year against $160,000 would provide me with a whopping $6,400.
Figuring out future values and rates of inflation
A huge part of our retirement planning, and one that helps us avoid sweeping generalizations, is figuring our future values of things we spend on now through proper rates of inflation. While the government provides its own gauge of inflation, determining a personal rate of inflation can be more beneficial when it comes to retirement planning.
By tracking expenses from month to month and year over year, we’ve managed to build a personal inflation rate. By maintaining this data for multiple years, we’ve been able to see where our costs go up (and sometimes down), and by how much over time, allowing us to make more accurate future financial projections regarding what our costs could look like in retirement.
Creating our own plan based on our specific needs
We’re fans of creating a retirement plan based around our specific needs rather than the generalizations of others. Due to things like expense tracking, income and investment tracking, and information relating to our spending habits, inflation, living location, lifestyle, and future and retirement goals, we’re able to create a plan that focuses on our personalized needs, wants, and abilities. With this plan in hand, we have a way to gauge progress and determine whether or where changes need to be made.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.