J.G. Wentworth writes often about retirement, encouraging our readers to save wisely and plan for potential retirement expenses. While we cannot offer specific financial advice, today we would like to invite all our readers, regardless of age, to step back and consider the following basic question: how much will I need to retire comfortably?
To answer this question, we thought we’d review four basic steps to plan for a comfortable retirement.
Step one: Estimate how much income you’ll need to live comfortably
For some people this is the hardest part of the process, yet here is one way to come to an answer: how is the quality of your life now? Is it reasonably acceptable, or nowhere near where you’d like it to be?
The surprising answer is that most people are living fairly close to the way they expect to live in the future. Estimating the income you will need in the future becomes simple because it is roughly equal to your income now. Even better, people approaching retirement age usually do not face the same financial burdens younger people do – such as paying for college and coming up with a mortgage – because those bills have ideally already been paid off, freeing up income for other expenses.
Regardless of your current or future situation, a reasonable estimate of how much income you’ll need to live comfortably should end up being fairly similar to the way you are living now, and once you get that figure sorted out you can then move onto the next step.
Step two: Add up future income from all sources
Retirement accounts, Social Security, pension, income properties, basic stocks – however short or long the list, you must make a fair and thorough count of these sources and come up with an estimate of future income, because only after you do so can you proceed to step three.
Step three: Estimate how much income you’ll need once you subtract Social Security and/or pension sources
You’ll receive regular income checks from Social Security and your pension (if you are receiving one); now you must subtract these payments to figure out the remaining money you’ll need to maintain your standard of living.
Let’s say, for example, you expect to receive approximately $28,000 a year from Social Security, have no pension, and live currently on $40,000 a year total. That means you’ll need another $12,000 a year to maintain your current standard of living. Without a job, how do you expect to get that money?
That’s where step four comes in.
Step four: Calculate how long you can live off your additional investments if you take out that remaining income, minus Social Security and pension, you’ll need every year
Let’s go back to the $12,000 figure from our example that you may need to maintain your current standard of living. You’ll need that amount each and every year for as long as your retirement lasts, which nowadays may be as long as 30 years.
So to live comfortably, you’ll need a nest egg large enough, and earning enough interest, that you can draw from each year. It’s just that simple!
Hold on a minute! It can’t be that simple.
Honestly, we agree. Retirement planning is something you should think through carefully, and with a financial planner or other professional besides. There are simply too many variables – including market fluctuations, taxes, and inflation rates, to name just a few – to make this advice anything but general.
That said, we do hope we have simplified retirement planning just a bit, and shown that there is indeed a way to plan for a comfortable retirement, and reward yourself for a well- lived, frugal life. And if you are approaching retirement and are scheduled to receive money from a structured settlement or annuity, or simply looking for a way to get cash now out of these future payments, call J.G. Wentworth anytime at 877-227-4713.
Nothing above is meant to provide financial or tax advice. You should meet with appropriate professionals for such services.