Forget about public speaking or bungee jumping. Not having enough retirement income is the new biggest fear of Brits (and folks all over the developed world).
Are you in the same boat? Do you worry that you will have to get a part-time job, downsize, or beg from relatives to survive your golden years? Keep reading through the article below to know whether your retirement income will be enough to tide you over or not.
Did You Take Into Account All the Retirement Income Killers?
Before you start calculating how much income you will need during retirement, you need to account for all those scenarios and situations that could drain your retirement income dry. We go through some of them below.
Not Having a Long-Term Care Plan
This can be one of the biggest drains on your retirement income if you are not prepared for it. It’s easy enough to make sure that you have some kind of long-term care insurance plan in place, so that if (or when) you need it in your old age, you are not dipping into your dwindling retirement income.
If you know that you have a history of dementia or some other debilitating brain disease, it would be a good idea to purchase a long-term insurance plan, just in case. It’s better than having to dip into your retirement income and running out of cash way too soon.
Not Accounting For Increased Healthcare Costs
Even if you don’t have any major illnesses or diseases in your family history, healthcare costs (and costs in general) are going to increase with time. Inflation will take care of that.
Hopefully, you have saved up enough, while accounting for such increased costs (adding 25% to how much you spend right now is a good way to do it). Consider this: it’s always better to have more saved up for retirement than less. You never know when that extra will come in handy.
Not Taking Care How Much You Withdraw Each Year
We will speak more about the 4% rule below, but ideally, you should be withdrawing 4% or less from your retirement income every year. The problem is that too many folks get overenthusiastic in their newfound retirement freedom and start spending willy-nilly without any discernment or care.
Don’t do this to your older self. Leave YOLO to the younger folks, and take care not to spend beyond your means, even if you are finally retired and looking to enjoy life.
Not Being Careful When Buying Big-Ticket Items
Presumably, you have already paid off your mortgage and all your other debt. Even so, you have to be careful when purchasing big-ticket items like a motorized home or a vintage car in your retirement years. These expenses can quickly add up and before you know it, the retirement income that was supposed to tide you over until the end is depleted and gone.
Not Being Cautious When Lending Money to Children
It can be hard to see your children struggling with money problems. But if you keep bailing them out whenever they have an issue, they are never going to learn and you are soon going to run out of income yourself.
If you are going to lend to them, make sure they have a plan to pay you back or ensure that you have enough left over for yourself.
Not Considering Divorce or Other Situation Changes
So many things can change in the 40 years or more (especially if your life expectancy extends rapidly) while you are retired. You could get divorced and get remarried. This will change your financial situation quite a bit as you will have to split your retirement savings according to the court rulings.
Make Sure You Use the 4% Rule
This is how retirement income is usually calculated. You would first add up all your current yearly expenses (or monthly times 12). Probably you won’t use 100% of your current income during retirement, since you will be living a simpler life.
Thus, 80% of your current monthly income is considered an average for how much you would spend during retirement.
This average will bump up or down depending on your specific situation. Use the various scenarios mentioned above to consider how that would change your retirement savings goals.
Once you have a final figure for your monthly expenses, then you would multiply that by the number of years you expect to live after retirement. If you have a history of longevity in your family, then make sure you account for that.
For example, if your monthly figure is 4000 pounds and you are planning for a 40-year retirement life span, you would need to save 40*12*4000, that is, 1.92 million pounds.
Each year, you would withdraw 4% from this 1.92 million pounds to sustain your lifestyle.
Focus on Income Not Overall Savings
Remember that the money you have saved up will not be sitting there idle. But, it will be making money for you throughout its lifespan. That is, you will have invested it into bonds, stocks, or a combination of investments.
That’s why you also need to think about how much income you will receive from your investments when you calculate how much to save for retirement. You can also take into account government pensions and other reliable income sources, like a business you might still own or dividends from stocks.
Don’t rely too much upon pensions or government social security programs though, since you have no idea if these will be bankrupt by the time you end up retiring. Better to think of them as a bonus rather than a necessity.
Retirement Income Doesn’t Need to Be an Adult Horror Story
You don’t need to start shivering in your boots or cowering with fear every time you think of your retirement savings plan. If you take the advice offered above and calculate your retirement income carefully, you should have more than enough to last you your entire lifetime.
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