Four Basic Retirement Planning Questions

How much cash flow will you need in retirement?

This is one of those good news, bad news subjects. The good news is that many of the expenses you had during your working years have disappeared. The bad news is that a few new ones (e.g., higher health care costs, increased travel and leisure expenses) may have taken their place. As a general rule, people tend to underestimate their post-retirement income needs. While every individual situation is different, assuming that you'll need eighty percent of your pre-retirement income is a good starting point. Let's say this amounts to $80,000.

The next step is to determine how much of your target income will have to be provided by your accumulated savings. In many cases, income from part-time work, your national social security system, and from defined benefit pension plans in which you have participated while working will provide a significant share of your target income. The key trade-off here (besides work versus leisure) is between employment income and pension income. Make sure to check whether your state and private pension plans place any limits on the amount of employment income you can receive without having your pension income reduced. Let's say these sources amount to $30,000. That leaves $50,000 in annual income (i.e., $80,000 less $30,000) that our investor's portfolio of financial assets must provide after he or she retires.

Another important point to keep in mind when making these calculations is what happens after a spouse dies. That usually, but not always affects the income received from these sources. For example, if a defined benefit pension plan provides a lifetime annuity only to one spouse, then his or her death may result in a substantial drop in income for the remaining spouse. On the other hand, if a couple decides instead to take a joint annuity, the annual payments received will be smaller, but will not terminate until the second spouse dies.

Next: What are your savings and bequest goals?

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