Your first step is, admittedly, a daunting one. But the rest of your retirement planning depends on it. Before anything else, you need to see where you stand financially. How much have you saved, and will that money, plus Social Security and any other pension income, generate enough cash to cover your expenses in retirement?
You may already have a bad feeling about what these numbers will tell you. Don’t sweat it, advisers suggest. This is the moment to confront the truth, knowing that there’s still time to change your investments to generate bigger returns, cut back your current spending to find more money for savings or (worst case) rethink your retirement expectations.
A qualified investment adviser who specializes in retirement planning can help you sort all this out. But do-it-yourselfers have some options, too. Laurence Kotlikoff, a Boston University economics professor, has created an online service called MaxiFi Planner, which compares your assets against your fixed expenses to calculate how much you can safely spend annually for the rest of your life. The program, which costs $99 for the first year and $79 for renewals, takes about 45 minutes to complete.
Let’s say you are a single 60-year-old earning $140,000 a year. You have $1.5 million in your 401(k) and will contribute 6 percent of your salary to it, or $8,400, a year, along with a 3 percent match from your employer until your planned retirement at 65. You will get roughly $500 a month from the pension plan that your company phased out several years ago but that you are still eligible to collect from, and can receive $3,150 a month from Social Security if you wait until you are 67 before you start taking it. (MaxiFi will help you calculate your Social Security income.) Also, you own a $500,000 home in New York State that costs you $25,000 a year in property tax, insurance and maintenance, and you plan to stay there.
The MaxiFi program estimates that your fixed annual spending on housing, taxes and insurance should range from $52,000 to $61,000 from ages 65 to 100, and that you’ll have enough left over for “discretionary spending” — money you can freely spend on food, travel, clothes and entertainment — of around $64,000 a year.
Unsatisfied with that amount? It’s easy to run an almost endless series of what-if scenarios to see how they would affect your retirement income and spending. For example: If at 65 you downsized into a $250,000 home that cost you $12,500 a year, it would make a huge difference over time. The money available for your annual discretionary spending would climb by $23,000, to $87,000, according to MaxiFi Planner.
This is a good time to take a look at your overall asset allocation — that is, how you’ve spread your savings among stocks, bonds and cash. Most investment company and brokerage websites have sections where you can review your allocation, including investments held at other firms (though you may have to enter this data yourself). Unless you’re depending on big investment gains over the next five years to make retirement doable, a balanced allocation of 50 percent stocks and 50 percent bonds is reasonable for someone expecting to live another 30 years or more.