Retirement Planning is more than about Money

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Written by Vid Ponnapalli, MS, CFP®, EA

Vid Ponnapalli is a Fee-Only financial advisor providing Customized Financial Planning, Investment Management, and Tax Services for Busy Professionals in New Jersey, New York City, and across the country.

October 17, 2015

It is a common misconception that retirement planning is all about saving for retirement. While it is indisputable saving is important, the true starting point in “Retirement Planning” is not about money. Retirement Planning starts by estimating how long you might live and then defining your retirement budget and goals.  Let us discuss what this means.

Estimating how long you might live

Advances in medicine and increased awareness regarding nutrition and fitness, are helping many of us live longer, healthier lives. That is indeed great news! However, this means we need to plan for longer retirement now. The question is how much longer? According to Social Security life expectancy calculator, life expectancy for a 50-year old male is 82.3 years and for a 50-year old female is 85.6 years. What these numbers and many mortality tables give us is “the average” life expectancy.  In other words, while a given individual has 50% probability to die before this age, they also have a 50% probability of outliving this age.  You don’t feel financially secure if your retirement plan is based on a 50% probability, do you? Given that, a good retirement plan should start with estimating life expectancy more accurately. How do you do that? One way is for you to make your own projections based on your health, family history. Alternately, you can estimate using online calculators such as Living to 100. In either case, the more accurate your life expectancy projection, the more accurate your retirement plan will be.

Defining Retirement budget

At a high level, Retirement expenses can be divided into four categories: 1) Living Expenses, 2) Health Care Expenses, 3) Taxes, and 4) Discretionary expenses. Retirement budget is how much you spend during your retirement years in order to manage all these expenses. Defining this budget is not as easy as it would seem. It has two components: First, identifying retirement expenses, and secondly setting retirement goals. You will need to identify what expenses will increase in your retirement and what expenses will decrease in your retirement. For example, kids’ expenses, mortgage-related expenses might reduce in retirement while healthcare expenses and travel & leisure expenses might increase. So, you need to sit down and identify these expenses carefully. Once you analyze anticipated retirement expenses, you may start thinking about what else you want to accomplish during retirement other than living a healthy life and paying taxes? i.e., what other goals you have? Do you want to travel the world?  Do you want to pay for your grand children’s education? Do you want to contribute to special events in your kids’ lives? Do you want to leave an estate to your heirs? In other words, your intended lifestyle in retirement defines your retirement budget.

So, what you think? Does this make sense? Are you are ready to plan for a secure retirement and want to discuss more? Please feel free to Schedule an appointment with me and I will be glad to advise.

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