I<\/span>f you don\u2019t have a financial plan for retirement, it\u2019s impossible to know where you stand. And the goal is clear: arrive at retirement able to replace enough of the income you earned during your working years to live comfortably.<\/p>\n You might have some secondary goals, too\u2014perhaps travel, entertainment, spoiling your grandchildren, or leaving a financial legacy for your family. But job one is to be able to maintain your standard of living\u2014not just on the day you retire, but over what might be a chapter of your life that could last several decades.<\/p>\n Social Security will replace about 54 percent of preretirement income for a low-income worker who retires earning $25,000 per year; that figure falls to 40 percent for people who retire with income in the $50,000 per year range, and someone who retires earning $90,000 would be able to replace just 33 percent.<\/p>\n Two-income households will beat those replacement rates, since two benefit checks will arrive each month. Savings or income from a pension might help close the gap, but if those aren\u2019t options you have a few other levers to pull that can help balance income and living expenses.<\/p>\n Making a plan for retirement is not about precision and certainty\u2014far too many variables and unpredictable developments can crop up along the way. But taking the time to estimate your likely expenses and income in retirement will get you beyond guesswork\u2014and even more important, a plan gives you a context for decision-making.<\/p>\n Do you need to cut spending and boost savings? Should you try to work a few extra years to close a projected income gap? If you haven\u2019t done the homework, you can\u2019t know where you\u2019re headed.<\/p>\n A widely used rule of thumb promoted by the financial services industry is that workers will need 70 percent to 80 percent of their preretirement income in retirement to maintain their standard of living.<\/p>\n That\u2019s a convenient motivator aimed at getting people to sock more money into their mutual fund accounts with these firms. But for most people, it\u2019s a very difficult hurdle to clear, considering the baseline provided by Social Security.<\/p>\n What\u2019s more, the rule of thumb is far too general: it might be right for you, and it might not.<\/p>\n Here\u2019s why: Your spending likely will vary over time. One researcher examined federal data on actual spending patterns and found that the needed replacement rate varies from 54 percent to 87 percent of income\u2014and that spending actually falls over the course of retirement.<\/p>\n The pattern is most pronounced for the oldest old\u2014a time when interest and ability to spend on travel, entertainment, and clothes tend to fall. This is especially true for more affluent households, which typically have more discretionary preretirement spending, and thus have more flexibility in retirement to cut back if funds aren\u2019t available.<\/p>\n Not all spending is equal. Some expenses are necessary\u2014think housing, food, health care, utilities, and transportation. Some are discretionary\u2014dining out, traveling, and entertainment.<\/p>\n You can bend the curve. If your expected spending and income don\u2019t look balanced, remember that it is possible to make changes. If retirement is in view for you over the next ten years, it may be possible to boost income somewhat\u2014but your best opportunities will be found on the expense side of the ledger\u2014for example, by downsizing your home, reducing the number of cars you drive or getting rid of high-cost monthly bills (think cable TV, or high mobile phone bills).<\/p>\n You can do this analysis yourself\u2014but the other path is to get some professional advice. Many people think financial advisors are for only the wealthy. But there are plenty of reasonably priced options that can pay for themselves\u2014and then some\u2014in the form of an improved retirement outcome.<\/p>\n Here are three basic questions you should try to answer as you sketch out your plan.<\/p>\n Start by analyzing what you spend now. You\u2019ll want to break this into three categories:<\/p>\n Analyze one full year of expenses, so that you can capture seasonal variations, and try to use a year that was typical for you\u2014not one with one-time large expenses, or years where discretionary spending was unusually low.<\/p>\n Of course, income in retirement is the other side of the equation. You\u2019ll want to have these possible sources of income on your radar screen:<\/p>\n No matter how well you plan, some very important factors will influence the outcome. As Yogi Berra is alleged to have said, \u201cIt\u2019s tough to make predictions, especially about the future.\u201d<\/p>\n Making a plan for retirement does give you a road map of what might occur and some important tools that can help you make decisions. But it\u2019s important to understand that many difficult-to-predict risk factors could force you to revise your plan along the way.<\/p>\n Most of us don\u2019t perceive these risks objectively. They include the possible need for long-term care, stock market risk, rising healthcare costs, and general inflation.<\/p>\n But the most important \u201crisk\u201d is your longevity\u2014how many years of retirement you\u2019ll ultimately fund. Planners call this \u201clongevity risk\u201d\u2014 the danger of exhausting resources before the end of life.<\/p>\n And risk actually is higher for wealthier people since they tend to rely less on Social Security\u2014which provides a guaranteed lifetime source of income\u2014and more on savings, which can be exhausted at advanced ages.<\/p>\n Risk also rises for widows who reach advanced ages since total household Social Security income falls when one spouse dies\u2014typically by about one-third. Some expenses fall, but poverty rates tend to rise in these situations.<\/p>\n Another important unknown is how long you\u2019ll stay employed. The timing of retirement is one of the most important factors influencing retirement security, as we\u2019ll see in the next chapter. But it\u2019s also difficult to predict, and half of retirees retire earlier than planned.<\/p>\n It\u2019s true that more older people have been working longer in recent years. But that trend has been concentrated mostly among more educated, high-income households.<\/p>\n Even worse, there is a gap between expectations and reality. Surveys often reveal that the \u201cretirement plan\u201d among people without adequate resources is to just \u201cwork forever.\u201d But that approach actually creates a special type of financial risk.<\/p>\n So, working longer is a good aspiration if that\u2019s what you want to do\u2014but as a retirement plan, it\u2019s shaky.<\/p>\n Making a plan for retirement can close income gaps<\/p>\n","protected":false},"author":3,"featured_media":757,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[165,166],"tags":[],"class_list":["post-13316","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-winter-2023","category-winter-2023-columns"],"acf":[],"_links":{"self":[{"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/posts\/13316","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/comments?post=13316"}],"version-history":[{"count":5,"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/posts\/13316\/revisions"}],"predecessor-version":[{"id":13685,"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/posts\/13316\/revisions\/13685"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/media\/757"}],"wp:attachment":[{"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/media?parent=13316"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/categories?post=13316"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/healthyaging.net\/magazine\/wp-json\/wp\/v2\/tags?post=13316"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}How Much Will You Need?<\/h3>\n
How to Make a Plan?<\/h3>\n
\n
Income<\/h3>\n
\n
Retirement Risks<\/h3>\n
Adapted and reprinted with permission from Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track<\/em><\/a> by Mark Miller, Agate, January 2023.<\/h5>\n","protected":false},"excerpt":{"rendered":"