As increasing numbers of Americans join the 65-and-over ranks, the United States faces a serious question—is this country prepared to meet the demands of a growing elderly population? The evidence that America is growing older is clear. In the last two decades, the 65-and-over population grew twice as fast as the rest of the population. Today, one of every nine Americans—a group of at least 32 million people—is 65 years of age or older. We begin this chapter by recognizing the importance of retirement planning. We show how individuals can analyze their current assets and liabilities to make sure they are suitable for retirement. Then, we suggest that individuals estimate their needs by considering changes in spending patterns and where and how they live. In estimating retirement expenses, we emphasize that expenses should be adjusted for inflation. Once expenses are estimated, we then turn to the importance of evaluating planned retirement income. Income from Social Security, other public pension plans, employer pensions plans, personal retirement plans, and annuities are discussed in depth. We stress the need for living on retirement income and balancing the retirement budget. Then, we stress the importance of estate planning. Its goal is to assure that the estate’s assets go to the rightful heirs, not Uncle Sam. Finally, we discuss the legal aspects of estate planning. Simple will, traditional marital share will, exemption trust will, and stated dollar will are described and compared. We offer tips in writing a will, selecting an executor, and altering or rewriting a will. Next, we differentiate among credit-shelter trust, disclaimer trust, living trust, and testamentary trust. We conclude the chapter with an explanation of federal and state taxes; estate income taxes, inheritance taxes, and gift taxes are described.
Remember: This is just a number, but it does take a bit of work and challenging math to calculate it. See the simple steps below to estimate your number.
STEP #1: Determine your estimated life expectancy
- The longer you live, the more money you will need.
- Everyone will be different. Some families have very long life expectancies, other families have shorter life expectancies. (Which side of your family do you take after? How long do they typically live?)
- Another way to get an estimate is to use the "Life Expectancy Calculator" link below from the Social Security Administration. You may want to add 15 years to this number to make sure you don't run out of money.
STEP #2: Determine how much annual cash flow you will need DURING retirement to pay your bills
- This will take some work on your part, since we all have different spending patterns and goals for our retirement.
- Start with calculating your actual current monthly spending and adjust it for annual inflation. What costs a dollar today will cost more later. (The standard estimate for inflation is 3% per year; however inflation has been more than twice that lately (2021-2022).
- A simpler way to calculate this number is to start with your gross income, adjust for annual inflation, then take 80% of that number to determine your spending requirement.
- Try some of the Retirement Calculators below to get an idea of the amount you'll need. Inflation will be factored in already.
- IMPORTANT NOTE: Don't forget to factor in the cost of medical coverage during retirement. Medicare does not cover all the expenses that you are use to from your employer provided medical coverage.
STEP #3: Take the amount from Step #2 and subtract the annual payments that you will receive from Social Security, Pension Plans, etc.
- This is the annual spending amount that you'll need to save on your own.
STEP #4: Calculate how much savings you will need at the point of retirement, using the estimates from Steps 1 and 3 above
- Try some of the Retirement Calculators below to get an idea of how much you'll need (and how much to save to get to your goal).
- Remember that you will need a little more money each year to maintain your current lifestyle due to inflation.
STEP #5: Calculate how much you will need to save each year to get to your goal from Step 4 above
- To accurately calculate this number on your own, you will need to estimate annual interest earned on your retirement fund (before and after retirement) over a long period of time and this can get a little complicated.
- Knowing how to use spreadsheets and a financial calculator will make this process easier. I recommend the TI BAII Financial Calculator and Microsoft Excel; however, there are several free online calculators available in the "Deeper Dive on Personal Finance" Module in this guide.
NOTE: Many folks will need the help of a professional to more accurately calculate their needs. Research will be required to determine who can address your needs best.