This section asks questions but does not provide answers. The questions are designed to help you define your retirement goal and to help you focus your expectations. Once you have some focus you can begin estimating what the financial requirements of your goals are.
In some ways, this is the most important part of retirement planning.
Good Luck.
There are three tasks in preparing and planning for retirement, or any other goal.
Discover where you are - it is a journey, you need to know where you are starting from.
Define your goal - if you don't have a goal you can't reach it, no matter how hard you work.
Determine how to get there - what is the best path from here to there?
The Retirement Planner worksheets help organize personal and investment data as well as assets, income and expenses. Taken as a whole, the worksheets give a picture of your current financial situation.
If you use the estimated values on the Personal Data page the picture can be pretty blurry. When you turn off the estimates and use the various worksheets with correct current values the focus becomes much better.
You should spend the time and effort necessary to fill in the numbers on all the pages. The improved accuracy is well worth the effort. The big advantage, however, is giving you a correct picture of your current situation.
What do you see when you picture yourself as retired? Try this imagery exercise - imagine that you are retired. Don't pick a special day, in this exercise you should select a typical day where nothing out of the ordinary is going on. Spend about five minutes thinking about what you will be doing on this one day of your retirement. Relax, close your eyes, see yourself living the day, waking up, eating breakfast, planning your activities, doing them, eating supper, your evening activities and bedtime.
Now ask yourself some questions:
Is it realistic - Is this something that you can realistically do? Do you have the skills? Is it really interesting?
Can you afford it - If you live like this what will it cost? Will you have enough saved up to be able to support this as a life style?
Will you be happy doing it - Is this something you can do day after day without burning out or getting bored? Will the things you imagined start to be chores or remain pleasant activities?
When you are done you should be able to write a short description of your retirement lifestyle.
Think about what the new costs will be. If you are going to spend a lot of time in your garden, what will it cost for seeds, plants, fertilizer, tools, etc.
Time on the golf course costs money - how much will your golfing expenses increase?
Traveling is expensive - will you buy something like an RV? How much will it cost, how long will you keep it, and what will its resale value be? How many days and how many miles will you drive it each year? Calculate your total expected costs over the life of the vehicle, divide it by the number of months you expect to own it and add that in to your monthly travel expenses. Remember to add a Start Date and an End Date.
Fishing is free, right? Not really. Make sure you count the extra travel costs, boat rental, license fees, etc. that you have when you spend more time fishing.
Be fair to yourself, don't set the costs on these activities too high or too low.
What money won't you be spending? Some of your expenses will go down after you retire. Your change in lifestyle will probably save you money on work clothes, lunches and snacks, etc. If your job required a daily commute of more than a few miles you may be saving $50 or more a month on car expenses. In an extreme case, you may even be able to eliminate a car and get rid of a car payment and a good part of your insurance.
You can use the Expense Worksheet as a tool to work through these changes. Go through the lists of categories and items in the worksheet. For each item ask yourself if you think you will be spending more or less after retirement. If an expense goes away, enter your last work month as the End Date. If it is a new expense, add it to the list using your retirement date as the Start Date. If an existing expense increases or decreases enter an End Date on the existing expense and enter a new item using your retirement as the start date.
After you have entered all your current and future information you can examine the results. Click on the Net Worth Timeline.
Remember, how you interpret the graphs is defined by what your goals are. If your goal is to not be a financial burden to your children then your Net Worth graph should have a positive value for the rest of your life. If your goal is to leave a legacy then your Net Worth at the end of your projected life should be large enough to fund that legacy. If your goal includes living in your home until you die then your Net Worth must be at least as large as the inflated future value of your home.
If you are in the fortunate position of having your finances exceed your requirements you can set a more ambitious goal. Be cautious, however, because the graph is presenting inflated future dollars which can be very deceiving. Your future Net Worth and future expenses will both be measured in inflated future dollars.
If you find that you can't achieve your goals you can go back and adjust the various elements to find a model that works. Always keep in mind that the Retirement Planner will work as a planning tool only if the numbers you enter into the program reflect your real activities. If you tell the program you are saving $100/mo and only save $50/mo the program won't be able to predict an accurate answer.
There is only one thing you can do to effectively change your situation - increase your investments, either by increasing income or reducing expenses. The changes you make have to reflect real changes in your lifestyle. If you simply edit some numbers in the program without making the associated changes in your spending or savings habits you are not going to see the results you need.
Increasing income - this is difficult to do. Most of us are working harder than we want and it isn't reasonable to go to our boss or customers and tell them we need more money. The very best we could hope for would be sympathy. However, if you have a hobby that you could expand into a small business or an interest in something that could earn money, this might be an opportunity.
Reducing expenses - this is simple, just examine your budget to locate items you can do without then eliminate them. All it takes is cold will, steely determination, and daily discipline for the rest of your life. Actually, it's not that bad. Once you get out of the habit of having something you don't miss it, its only the transition period that is difficult. For example: I was in the habit of going to the coffee shop every morning and getting a Latte. $2.50 for a Latte every day for 50 weeks a year is over $600.00! Instead, I brew a thermos of coffee at home and bring it in. My coffee is better, less bitter and I can pick the flavor, and it costs me about $0.30 a day for two large cups. Keep in mind, though, it only works if you invest the savings. Increase your automatic withdrawal into your 401(k), pension plan or savings account and make yourself live on the remainder.
I've included a large number of categories and items in the Expense Worksheet to serve as prompts to help you fill in all this data. It is important to have an accurate handle on expenses because they are tracked on a monthly basis and errors here are multiplied many times. Most errors in the Expense Worksheet are errors of omission, that is, you are more likely to forget to enter something than you are to enter it incorrectly. Errors of omission are worse than value errors. For example, if you forget to enter your $25/mo water bill it is a $9,000 error over a 30 year forecast but if you incorrectly enter it as $20/mo it is only an $1,800 error.
You want to enter all your expenses and you want them to be as accurate as possible. This is an area where it is worth the time and effort to be careful and look things up on old receipts or from your checkbook.
The un-helpful answer is enough.
For most of us, at the heart of what we want is to have enough money to provide for ourselves after we retire, through our frail years and to have enough left at the end to ensure we are not a burden to those around us and that our other goals are met.
Since it costs more money to live longer the question of 'How much is enough?' is really two questions - 'How much does it cost me to live each month?' and 'How long will I live?'.
It is possible to estimate what your monthly expenses will be, that is what this program is designed to do and I hope you find it helpful. This program won't help you estimate how long you will live, but there are resources on the internet that can.
Two sites that are useful and aren't trying to sell something are:
The Center for Disease Control maintains a National Center for Health Statistics web site. The site has statistics covering all aspects of health, including a life expectancy. They also have a 'fast facts' site at http://www.cdc.gov/nchs/fastats/lifexpec.htm which gives some simple statistics for life expectancy.
Their statistics show that an American man who was 65 in 2000 should expect to live for 16.3 more years - or until slightly over 81. An American woman who was 65 in 2000 can expect to live 19.2 more years - or until slightly over 84.
The Alliance for Aging Research maintains a web site at http://www.livingto100.com that contains a questionnaire with about a dozen simple questions about your health and lifestyle. After you answer the questions the site will estimate your life expectancy. This is almost certainly a more accurate estimate than the National Center for Health Statistics site because it is driven by the specifics of your health and your lifestyle.
There are a couple of issues with the answers these web sites provide. First, they are too broad and general. The CDC estimate is based on an 'average' person. Collectively, we all group around a point that is the average but individually we are either above or below that point.
The other issue is that the question that they assume we are asking is the wrong question. By giving the average age of death for some group they are giving the age at which half that population will die. If you make your plans assuming you will die at that age you have a 50% chance of living too long and running out of money. The living too long part is probably a good deal but the running out of money is not.
My recommendation is to use these sites to create an estimate for your life expectancy - then, keeping in mind that this is a 50th percentile projection, add 0 to 5 years to it, depending on how accurate you think it is and your own opinion of your general health.
Inflation is a difficult value to pin down. Unfortunately, it is also a fairly critical value since changing it up or down just one or two percent can have a dramatic effect on how your savings and investments appear to perform. The key word is 'appear' since changing a number in the program won't change the actual performance of any investment.
Historically, our economy has moved through periods of low and high inflation. At the moment inflation is pretty low and given the sluggish economy it will probably stay there for the next year or two. Beyond that the crystal ball is very cloudy.
The graph on the right shows that inflation was mostly in the range of 4% to 14% from 1971 to 1982. Over the last 20 years, 1983 until now, it has been consistently below 6%. The average over the entire period is 4.99%, a fairly high number and pushed up by the excess inflation of the 70's. The median value over the entire period is 3.85%. The average value over the last 10 years is only 2.54% but this has been a period of unusually low inflation.
If you don't have a strong opinion I would recommend a value of around 3.5% if you are projecting for a period of 20 years or less. For longer projections I would pick something around 4.5%. Consumer Price Index Information.
The return on your investments is another critical and difficult to predict value. The annual stock market returns for the large companies tracked by the S&P 500 and the Dow Jones Industrial Average (the DOW) have bounced around at an astounding rate. During 2002 the S&P 500 lost 23% and while back in 1995 it had made 34%. The stock market is not the only game in town, you can also invest in bonds, money market funds, CDs, real estate, etc.
When you decide how you are going to invest your money you need to evaluate all the options you are comfortable with and decide between them. This program, however, isn't about how to invest, it is about understanding how to use your investments to pay for your retirement.
Most of the alternative investment options pay less than the stock market but attract investors because they are less volatile and more predictable. Year in and year out, present time included, there are more investors and more retirement dollars in the stock market than anywhere else. Because of that, we will focus on the stock market as an predictor of investment returns.
Since you are trying to estimate your investment return over a fairly long period of time it is reasonable to use a long term historical average as an estimate of performance. Between 1980 and 2002 the S&P 500 rose an average of 10.7% per year while the DOW rose 11.4%.
The market this year is, however, pretty subdued and there is no real evidence that it is going to recover quickly. A reasonable estimate of stock market performance would be something less than the historical average of 10.7% to 11.4%. In addition, you - as an intelligent and educated investor - have diversified a bit and own some other lower paying and more stable investments.
Taking all this into account, use either 7.0% or 7.5% for your estimate of Investment Return.