There is a lot of math involved, but you don’t need to pay someone thousands of dollars to create a fancy financial plan that doesn’t make sense. Go through the following steps to do your own calculations: Why should you love math or believe in it? Because money consists of numbers and there is only one way of calculating money -- through math. As much as we might not like it, it’s part of our lives.
Spending
You can’t possibly know how much you need, to retire until you know how much you will spend.
My suggestion? Use what you spend now and average your total bank withdrawals over the last 24 months and keep track of this number. Let’s use $ 80,000 as your average pay outs per year including your mortgage payments of estimated $30,000 per year.
Estimate your retirement income
When you retire, you’ll have social security and possibly a pension. There are also many overlooked ways to generate income during retirement. How much income will you have?
For our example, let’s assume you’ll have social security and pension income of $30,000.
You can see that this person needs to come up with an extra $20,000 in order to meet her annual income needs. Assuming you won’t have a mortgage payment anymore -- if you do, you are not ready to retire yet.
Conventional wisdom in the financial industry says that people need about 80 percent of their pre-retirement income to be comfortable after retiring. Some financial advisors are now raising this to 90 percent, even 110 percent of pre-retirement income.
Do the math
We know that this person will need an extra $50,000. Now we have to figure out how much to invest in order to create that $50,000.
This isn’t difficult to do at all.
Take your $50,000 and divide it by the return you think you’ll earn on your investments. I use 5%.
Using 5% might seem like a high number right now.
Rates are much lower now but it’s not reasonable to expect that rates and returns will remain this low over the remainder of your life. 5% is a reasonable number to use (although I can’t guarantee that will be the case).
So, if we take $50,000 and divide it by 5%—you get $1,000,000. That means you have to have $1,000,000, invest it at 5% (over the long run) in order to earn $50,000 a year more.
You now have your target—$1,000,000. Is that a scary number? Yes, if you did not prepare for it.
What have you saved so far? How much will it be worth when you retire?
One issue is when your income changes, you start taking out distributions from your IRA, your cost of living shifts dramatically (you pay off your mortgage) and/or a host of other variables.
I suggest that we all prioritize to minimize our mortgage debts by the time we retire. Everything comes back to our mortgaged home loan. If you have a very large mortgage debt asks yourself: When can I pay this off to start to plan for retirement? Do not give your children a house with a large mortgage debt —you will just be passing your problems on to them. I would rather you give them money for a down payment of their homes.
If you noticed, I am trying to also communicate with a lot of homeowners now who still have very large mortgage balances and are still not getting my point. Never see the payment as the big picture of your homeownership, see the mortgage balance and see how or when you intend to pay that off.
Realty agents used to have a sales pitch which tells their clients that once your property values have gone up, you can sell or refinance to take out cash. I have not heard that in a while and probably won’t , for a while. So, now we all learned that nothing is fixed, anything that goes up will have to come down at some point.
Homeowners, please see a rule of thumb that lenders use to qualify for home ownership. It’s like this: you should be paying only about 31% of your gross monthly income towards your housing payment, whether a mortgage or for rental.
If we all used this rule of thumb before, I believe we might not have gotten into this mess.
Anyway, this article is to directly convince homeowners to take a serious look at how much they owe and to see into the future as far as what they need when they get to their retirement age. Thanks for this interesting inquiry from a caller.
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Please call and continue to send your inquiries in, appreciate your calls. Call Ken Go at (562)697-7028 or write to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
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