Target Retirement Income to Determine Your Retirement Savings Number

When determining how much money you need to accumulate to enjoy your idea of a comfortable retirement, you can use several methods.  The easiest is to go with a number that financial planners think will be needed for a secure retirement, say $ 1.3 million dollars.  The next easiest is to use a formula.  One popular formula is based on a multiplier of your current wage.  That multiplier ranges from 15 times your current annual wage to 22 times your current annual wage, depending on the source.  A third way is to target the amount of income your retirement assets will need to produce.  In other words, in addition to a company pension, if any, and Social Security, how much additional income will you need to maintain the standard of living you want in retirement.  Once you have estimated that amount, you then calculate how many dollars of retirement assets it will take to produce that income given what you consider to be a reasonable return on those assets.  The result is your retirement savings number.

Targeting retirement income keeps it real

I prefer targeting retirement income because it keeps you in reality.  After all, retirement income is the whole point of saving for retirement; it is not how much you have accumulated, but how much income it can produce that counts.  This is an important distinction, because it is easy to get distracted by large amounts of money as your retirement assets grow.  People most often talk of the amount of money they have in retirement savings when they talk to me about retirement security.  They think two or three hundred thousand dollars in retirement savings is a lot of money.  When I point out that two or three hundred thousand dollars in retirement savings will only produce $8,000 to $12,000 in annual retirement income, they are often shocked and surprised.  Suddenly, what seemed like a large sum of money isn’t so large anymore.  Don’t get me wrong, two or three hundred thousand dollars is a large sum of money, but not when someone needs $20,000 or $30,000 a year to supplement pension and Social Security income.  In reality, it is a good start.  Unfortunately, these people are often in their late fifties or early sixties with limited time to add to their retirement savings.

The truth is most people save all of their lives for retirement but don’t really know what they are saving for.  They assume that because they have accumulated hundreds of thousands of dollars it will be enough money to secure their retirements.  Not until they are at the threshold of retirement do they consider just how much income they will need in addition to pensions and Social Security to maintain their standard of living.  Often they come up short.  True they have accumulated a large nest egg, but it isn’t nearly large enough.

Targeting retirement income accounts for change

Another reason to target retirement income is change.  The amount of money you will need in retirement is likely to change many times as you progress through life.  Your standard of living, your values, and your income will probably change over your working life.  Living standards and income may go up or down or up and down.  Rosa and I certainly experienced those types of changes.  What you value may change, as well.  You may become more materialistic or less.  You may decide to settle for a more modest standard of living and retire early, or work additional years beyond traditional retirement to enjoy a more lavish lifestyle when you retire.  Don’t forget external changes such as the rate of inflation, changes to pension plans, changes to Social Security benefits and Medicare that will affect the amount of supplemental retirement income you will need. As your estimated retirement income changes over the years, you can adjust your retirement savings number accordingly.

Don’t forget inflation

When estimating your retirement income, consider inflation.  It’s not how much income you will need the day you retire, but how much you will need ten, twenty, and even thirty years down the road.  During your working life, you have received periodic merit and cost of living raises that insulated you from the cost of inflation   In retirement, you will live on a fixed income.  With each passing day, your cost of living will increase while your income remains the same.  There may be cost of living increases to Social Security, but these have proven to be far from adequate to keep up with inflation.

You must be proactive and plan for inflation in retirement so you have the assets necessary to generate enough income to offset the effects of inflation during your retirement years.  Use the rule of 72 to quickly determine your cost of living in the future.  Divide  72 by the rate of inflation and that will tell you how many years it will take to double your cost of living.  For example, with a 2% inflation rate, it will take 36 years for your cost of living to double (72 divided by 2).  At a 3% rate of inflation, your cost of living doubles in 24 years (72 divided by 3).

Retirement calculators can help 

Retirement calculators can help you estimate the retirement income you will need and how much money it will take to generate that income while accounting for inflation and taxes.  Here are some calculators to try: Bankrate Retirement Income Calculator, Bankrate Retirement Planner Calculator, The Real Deal Retirement Toolbox (numerous retirement calculators).

Rosa and I have always thought of savings in terms of the income it could produce and it has served us well.  Of course, our goal from the beginning was financial independence which required income to replace wages.  Most people equate retirement with financial independence and they are correct in doing so, but only if they have enough retirement income to support themselves without working in retirement.  It is all about income, so target retirement income when determining your retirement savings number.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

The Cost of Postponing Retirement

It is popular today for financial planners to suggest a postponement of retirement as one solution for those who feel they have not saved enough to fund the kind of retirement they desire or for those who are concerned about running out of money while in retirement. Putting off retirement gives a person more years to accumulate retirement savings and fewer years of retirement living to finance, both of which will serve to improve retirement security. Those are the benefits, but rarely is there a mention of the cost of postponing retirement. It’s understandable; the financial planners are focused on helping their clients reach their retirement asset and income goals. Shaving some years off of retirement makes it easier to attain those targets.

The cost of postponing retirement

Those lost years of retirement is the cost you pay for delaying your retirement. That should be obvious. But before you toss away a few years of retirement, you should be aware of the ramifications:

  • Once time is lost, it cannot be recovered; it is gone forever.
  • Those years of retirement that are forfeited would have been the first years of retirement, the years when you were at your youngest and most active.
  • You will never know what opportunities were lost as a result of postponing your retirement, but not knowing does not change the fact that you lost them.
  • Health problems can beset you at any time. Forfeiting years of retirement when you were in relative good health may rob you of the chance to fully enjoy retirement should you develop a debilitating illness in the meantime.  Also consider that you may retain your health but your spouse or partner may not. Those lost years of retirement may have been the only time you would have had to share retirement fully with each other.
  • If you have existing chronic health problems or if you are at risk for a heart attack or stroke, can you survive several additional years of work? A delay in retirement might be a death sentence.

Our experience with retirement and the price of time

Rosa and I have been retired since May of 2009. Before we retired, I thought that our retirement years would pass slowly, after all, we were out of the working world rat race. Our life would slow down and so would time. Not so. These five and a half years have flown by. It seems that time has sped up rather than slowed down. I expect it will accelerate even more as we continue to  age.

Now consider that we retired at age 56. Postponing retirement until age 66 would have increased our retirement assets by about 70%. Even waiting five more years would have added about 25% to our retirement assets. That’s a lot of retirement income and security we lost, but the alternative was to give up the time. We didn’t think it was worth it then, and our years in retirement have confirmed the correctness of our decision.

Rosa’s health was deteriorating quickly at the time she left teaching. Retirement literally saved her life.

We were able to travel a lot in those first few years. We felt good and travel was relatively cheap during the aftermath of the financial crisis of 2008. However, long distance travel eventually became a burden due to health problems that Rosa and I developed. We rarely travel long distances now, although we take short day trips that have us back in our own bed the same night. If we had postponed our retirement even three years, we would have missed out on the opportunity for some wonderful travel experiences, and frequent, long distance travel in retirement would have been out of the question.

Time versus lifestyle

Some may have no choice but to postpone retirement in order to accumulate more assets, but many can scale back on their living expenses and expectations for life in retirement and retire on schedule. If you have a choice between a scaled-down retirement and postponing retirement, carefully weight the cost of postponing. Believe me, those years you are considering trading for a better retirement, additional financial security, or both are priceless.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Understand Food Product Dating and Save Hundreds on Food Expense

You go to great lengths to get a good value for the food dollars you spend: you use coupons, purchase store brands, apply the buy on sale not when you need it and the buy on sale and stock up strategies to lower your grocery bill. Yet, misconceptions about food product dating may be causing you to throw out good food needlessly, costing you hundreds of dollars annually, dollars you can’t afford to lose.

You are not alone; Americans waste 160 billion pounds of food per year according to Jonathan Bloom author of American Wasteland. That is edible food that goes uneaten. Bloom estimates that food waste costs an average family of four from $1,365 to $2,275 annually. A 2013 study conducted jointly by Harvard Law School and the National Resources Defense Council (NDRC) determined that widespread misconceptions surrounding food product dating contribute to food waste and that a clear understanding of the meaning of food product dating could significantly reduce food waste and save consumers money.

Food product dating is not about food safety

The primary misconception about food product dating is that it is related to food safety. People think that food is not safe to eat after the date on the package. The truth is, the dates that appear on food packaging have nothing to do with food safety. Food product dating is meant to convey information related to the freshness and quality of the food. In an effort to protect the reputation of their product brands, food processors date food products to encourage consumption at peak freshness and quality. The food is still good to eat significantly past the date on the package. In fact, it will become unpalatable due to spoilage long before it is unsafe to consume.

Definitions of food product dating terms

General explanations of the meaning of common food product dating designations, according to the authors of the joint study conducted by Harvard Law School and the NDRC,  follow. Notice that they have nothing to do with food safety.

  • “Production” or “Pack” date: The date the product was manufactured or placed in final packaging.
  • “Sell by” date: This date is used by retailers for stock control. It is the last day that the product can be sold and retain a reasonable amount of shelf life at peak quality for the consumer after the purchase.
  • “Best if used by” date: The estimated date at which the product will no longer be at peak quality.
  • “Use by” date: The last date recommended for the consumption of the product at peak quality.
  • “Freeze by” date: The last date the product can be frozen to maintain peak quality.
  • “Enjoy by” date: This designation has not been clearly defined.

Food storage in the home determines useful shelf life

How a food product is stored in the home is a more important determinant of useful shelf life than the date on the product. Minimize the time perishable food is exposed to temperatures in the danger zone (40 degrees to 120 degrees Fahrenheit), and avoid the exposure of non-perishable foods to air, moisture, heat, and light to extend their useful shelf life. Freeze food products to maintain their freshness.

How we use food product dating 

Rosa and I use food product dating to determine the relative freshness of the food products we buy at the store and for the purpose of rotating food inventory in our pantry. Food dating is a helpful reminder to us to use up a product before it goes bad, but it is not an indicator of when the food is no longer palatable. We regularly use food products long past the package date as long as our senses tell us they are still edible. In fact, we will purchase non-perishable food (snack crackers, pretzels, cookies, and such) that are past the date on the packaging if the price is right. We have found that freezing these products for 24 hours extends their shelf life and gives us ample opportunity to consume them before they become unpalatable.

Stop throwing money away!

Don’t discard food products solely because they have exceeded product dating. Nothing is wrong with them except that they may not be at peak quality. Use your senses to determine when it is time to throw out the product. Does it smell bad? Does it look old or spoiled? Does it taste bad? Let your senses be your guide and save money.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages