Imagine it’s your first day of never having to work again. You’ve waited a very long time for this day! So now that it’s here, what are you going to do today?
- Are you going to get some stuff done around the house?
- Maybe you’re going to play golf, or do that other hobby you like to do.
- Maybe you’ll finally relax!
Now imagine a week has gone by. How many times have you:
- Ventured out?
- Gone out to lunch?
- Been to the store?
- Made purchases?
- Visited family or friends?
Now imagine it’s been a year. How many:
- Trips have you planned?
- Places have you traveled?
- Projects have you started?
- Groups have you joined?
- Other things you’ve done to keep yourself busy and occupied?
Now for the not-so-fun stuff. How many times have you:
- Been to the doctor?
- Been to the dentist?
- Been to the hospital?
- Filled prescriptions?
- Had an x-ray?
- Had a surgery?
What about the number of times:
- The car had a problem and needed to be repaired.
- Something in the house stopped working.
- You had to get a new washing machine or refrigerator.
- You needed a new roof or had to fix a foundation crack.
- You had to handle some unexpected emergency.
Is your fixed income starting to feel a little constricting?
Being Realistic About Your Needs
Why am I asking you go through this mental exploration of ups and downs?
Because of this reason: It’s critical that your entire financial freedom plan is based on realistic numbers that you believe in; not just numbers you think you can live with.
Make sure you understand the difference between the two. I read blogs all the time where people seem to try to talk themselves into thinking that they can retire comfortably on some small amount of savings and will be happy living near poverty. Why? To me, it seems, they are more fixated on achieving the goal of early retirement rather than understanding what the goal means.
Don’t fool yourself into doing things backward. It’s a recipe for disaster!
Your retirement plan needs to be based on your spending habits and your lifestyle. It has to be reflective of the way that you want to live. People who have achieved financial independence stay that way because their plan was built to suit their goals rather than only to reach some arbitrary number.
Depending on how much work you’ve already put into this topic, this mental exploration may also help you gain a better understanding of what retired life will be like.
For some people, you may have realized that your life in the future may require more money than you thought. But for other people, they may be surprised to find out that it could require less.
A Starting Point: 80%
Confused about where to take your first step towards gauging your retirement income?
Don’t be. Financial research has shown that, on average, most people tend to live on roughly 80% of their pre-retirement income.
Why 80%? Because that’s actually about how much you already live off of right now. Here’s how they come up with that figure:
- Start off with 100% of your gross household pay.
- Subtract away 10% for your 401(k) contributions (if that’s how much you contribute) since you won’t be contributing to a 401(k) when you’re retired.
- Subtract away another 7.65% for your FICA (Social Security and Medicare) taxes since you will no longer be paying those either once you’re retired.
- Finally, subtract away another 5 to 10% since you will cease to have a lot of the same work expenses such as commuting, new clothes, dry cleaning, eating out at lunch, after work drinks, etc.
Remember: 80% is just another general, average recommendation to give you a place to start.
Do you have an annuity? You may not know this, but it is possible to sell annuity payment for cash right now to use how you best want for your retirement. Since interest rates are still low and they aren’t about to go up anytime soon, in order to get the most money for your retirement, you might be better off investing it yourself.
To get a better idea of what will fit your specific needs, you’ll need to create an estimated future budget … and we’re going to do that right now!