Review: Great retirement planning looks at spending, not income

Planning for retirement is hard. There’s a lot to think about, and so much of what you need to prepare for is uncertain.

But as this article points out, everything starts with trying to figure out how much you’ll spend in retirement. Once you know that, you can figure out how you’ll get there (or how far you’ll need to cut back).

Because most people really don’t have a great idea of what they want to do in retirement, all sorts of rules of thumb have popped up over the years. One of the common ones is that you need roughly 85% of your pre-retirement income to maintain your standard of living after retirement (though if you look into the numbers, it actually comes out to a little bit less than this – and it varies by income level).

The author really doesn’t like this approach. I’m with him part of the way. Replacement ratios can be great tools to get started. They may not be as specific as breaking out the spreadsheet, but they can get you close.

And that’s a whole lot better than what most people are doing right now.

I want to echo one of the other points made here: You need to think carefully about when you decide to start taking your Social Security benefits. When you start taking them can have a huge impact on how successful your retirement will be.

The later you start taking your benefits, the bigger the check will be every month. But it all depends on your specific situation.

Deciding when to take your benefits is a balancing act. You have to weigh the benefits of a bigger check over fewer years against a smaller check for a longer time.

If your family skews toward living longer, then you would likely be better waiting to take your benefits. If your relatives weren’t so long-lived, or you have health issues yourself, then it might make sense to start taking your benefits earlier.

But whatever you do, it should be a considered choice. This is something that you want to make sure you get right – Social Security is a big part of most people’s reliable income in retirement.

For more on how to think about your Social Security decision, see our ebook When Should You Claim Social Security?

 

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