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Is Your Retirement Plan DOA?

Written by Neal Frankle - 4 Comments

Is Your Retirement Plan DOA?

If you feel like your retirement plan is DOA, you are in good company. The financial crisis of 2008 whacked most people’s faith in the future. In fact, this is one big reason why more and more people aren’t ready for retirement.

Government debt is astronomical, and many people aren’t sure Social Security is going to be there as promised. Long-term interest rates are low, which reduces your potential income from fixed income investments. We’re living longer and high-paying jobs are more difficult to land. People are worried about potential inflation and what it might do to their savings. Taken together, it might be reasonable to conclude that you’ll be working for a living as long as you can breathe.

According to Allianz Life Insurance Company, the statistics for retirement are sobering. The average person:

  1. Retires at 62
  2. Will be retired for 18 years
  3. Spends $50,000 a year
  4. Gets a little over 40% of their income from Social Security
  5. Spends about $5,000 a year on health insurance and medical care
  6. Owes $50,000

If this describes you, there should be a number of questions that are raised in your mind:

  1. How much am I going to spend in retirement?
  2. How am I going to generate the income that I need in retirement?
  3. How can I get out of debt before I retire?

And the Grandmother of all retirement questions:

Will I ever be able to retire? And what happens if I physically can’t work?

Each of these questions deserve real consideration. Let’s go through each and see if we can answer them:

1. How much am I going to spend in retirement?

There is no sure-fire way to answer this question. You have to approximate. But there is no way you’ll be able to approximate the answer to this unless and until you know how much you spend now. As you probably know, I’m a huge fan of tracking your spending against your budgets. You should implement a budget tracking system today no matter if you are retired now or plan on retiring in the distant future. This information is central to your retirement plan.

2. How are you going to generate income during retirement?

The first question approximates how much you’ll need. The next question tries to answer how you’re going to get it. The only way I know how to address this is to make a list of all the possible ways you can generate income during retirement.

How much in social security benefits are you going to receive? Are there any pensions that will be coming in? When will you stop working? Will you work part-time after you retire? If so, how much will you earn? How much money will you have saved for retirement> How will it be invested? How much money can your retirement investments produce?

All these questions can be answered by creating a mini-financial plan. Don’t ignore this step.

3. How can I get out of debt before I retire?

If you’re in debt, you have to first identify what caused the debt problem. Some people find themselves in debt because of some calamitous situation. Others accumulate debt slowly over the years and find they can’t get out. Believe it or not, it’s the latter situation that troubles me. People in this situation face chronic debt issues. If you are in this camp, then you owe it to yourself to do whatever it takes to get out of debt now.

The last question – when will I be able to retire? – can only be answered by your own retirement plan. I strongly recommend that you create a plan and then update it every year. I recently updated my own plan and, when I did, I realized that I needed more term life insurance. Even though I’m a professional, I would never have realized that I needed to do this had I not created a plan.

Doctors need checkups sometimes. So do you. Financial planners need financial plans. You do too.

If you run your financial plan, track your budget, get out of debt, and set up your retirement income, you’ll have done everything possible to make your retirement dream become reality. You may realize that you missed the mark and have to make adjustments. No problem. It’s far better to realize this sooner rather than later.

Have you run retirement projections? How often do you update them? Were you surprised by what you learned?

Published on May 19th, 2011
Modified on May 23rd, 2011 - 4 Comments
Filed under: Planning, Retirement, Saving & Investing

About the author: is a Certified Financial Planner in Los Angeles whose goal is to help people improve their finances and find balance in life. He covers these topics at his personal blog Wealth Pilgrim.

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4 Responses to “Is Your Retirement Plan DOA?”

  1. 1
    First Gen American Says:

    Wow..this data can\\\’t be right. Average person spends $50K/year, so can I assume a married retired couple is spending $100K/year? No way that\\\’s right as the average household income is somewhere in the $60K/year range.

  2. 2
    No Debt MBA Says:

    I run retirement projections once or twice a year to check in and see how I’m doing. The first time I went through this exercise I was pleasantly surprised at how far along I was, but paying for my MBA will be a big step back in the short term. I have to say though that I spend less than $50,000 per year and am skeptical of receiving full Social Security benefits.

  3. 3
    Petunia 100 Says:

    I have an Excel spreadsheet which I update once a year. I use the future value function to calculate how much my nest egg will be worth at age 65 and age 67 assuming different rates of return. I crunch for my current savings rate and if I stopped saving now. It’s good to know where you currently stand. :)

    I’m on track to hit my goals, which is nice. A big question though, is are my savings targets high enough?

  4. 4
    Doable Finance Says:

    I just turned 63. It’s kind of hard to quit working.

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