Friday, May 6, 2011

A Quick Recap of Retirement Income

The intent of the three recent columns, Where Will Your Retirement Income Come From? Parts 1 through 3, was simply to identify where we can expect retirement income to come from once we leave the happy world of biweekly paychecks, and to estimate how much that income might be.

While several topics were covered and a lot of information was provided, the highlights are these.

The most common sources of retirement income are going to be personal savings and Social Security retirement benefits.  Relatively few fortunate families will also be vested in a corporate pension plan, technically known as a defined benefit plan.  Retirement benefits for these plans are defined in advance by the plan and are usually determined by how much salary you earned while you were employed, not by how well your investments performed after you contributed them.

Most company retirement plans since the 80's have been defined contribution plans.  That means that you made contributions to IRAs, 401Ks and similar retirement plans and and how much you can spend in retirement depends on how well your investments have performed.  These are tax-advantaged personal savings accounts.  You may have saved money in regular savings and investment accounts, as well.  Combined, these tax-advantaged and taxable accounts make up your personal savings for retirement.

You can determine how much Social Security benefits will be for you and your spouse using various calculators at the SSA website.  Your benefits will vary significantly depending on the age you decide to start receiving them.  This was covered in Part 1.

If you invest your personal savings conservatively in U.S. Treasury TIPs bonds or mutual funds when you retire, you will be able to spend about 4.46% of the amount of those savings on the day you retire every year with a high probability that those savings will last for 30 years.

If you retire with $75,000 in your 401K and $25,000 in a bank account, for example, your personal savings would total $100,000 and you could expect to spend $4,460 annually for thirty years.  This was covered in Part 2.

You can calculate a pretty good estimate of your expected annual income in retirement by adding your expected annual Social Security benefits to 4.46% of you total expected personal savings on the day you retire:

Annual Retirement Income =  Annual Social Security Benefits + (.0446 x Personal Savings)

Many public employees (teachers, municipal workers and railroad workers, for example) have their own retirement plan in lieu of Social Security.  They need to substitute expected annual benefits from those plans for Social Security in the retirement income equation above.  This was covered in Part 3.

Public employees covered by a public pension plan may have their Social Security benefits reduced.  Retirees who keep working and have income from a job or self-employment will also have their Social Security benefits reduced until they reach full retirement age.

That covers the basics on expected income retirement.  Next, we'll look at expected retirement costs.