Estimating Post-Retirement Income and Expenses
Post-retirement income
A popular question when it comes to retirement planning is “How much income will I need to support my lifestyle after I retire?” A general guide is that your retirement expenses should be around 70% of your pre-retirement living expenses. Therefore your retirement income should be at least 70% of your pre-retirement take-home pay so you can cover your living expenses.
If you retire at age 60 and your take home pay at age 59 is $60,000 a year, then your retirement income should at least be 70% of $60,000 which is $42,000 a year.
Pension
This is the most common retirement income. A pension is money paid on a regular basis to the retiree. The timing of the cash flow can be expected with reasonable certainty, for example weekly or monthly. A pension that pays out annually is also known as annuity.
Types are different types of pensions such as state pension, company pension and personal pension.
Investment
If you have built an investment portfolio during your pre-retirement days, then you could live off the investment income your portfolio earns for you. Income from investment include dividend, interest, rental and others.
You could also cash in on your investment by selling them and realizing the profit.
Tap into your home equity
Reverse mortgage is a form of loan available to senior home owners. It gives them the opportunity to tap into the equity that is locked in their properties.
Generally, no repayment is required. Repayment is only due when the borrower moves, passes away or the house is sold. The proceeds from the sale of the house will go towards repaying the loan.
Post-retirement living expense
Apart from the 70% guide, another way to estimate your expenses is by taking your current expenses and modifying it upwards or downwards to reflect your lifestyle during retirement.
For example, since you've retired and no longer working, you will spend less on commuting, office attire and lunch. Your mortgage will probably be paid off, hence no mortgage payments. Your children will probably already graduate and working. You have less mouth to feed.
On the other hand, you might spend more on pursuing your interests and hobbies. You might also spend more on medical as your health deteriorates.