Uncertainties in Budgeting for Retirement

When you analyze your finances and your ability to retire, it's important to step back and keep the big picture in view.  There are many dimensions to the problem, sometimes a variety of solutions, and they all tie together. Remember the words of the wise professor who said "Imprecise answers to the right questions are far superior to correct answers to the wrong questions!"  So it is with retirement.  In this section we will provide an overview of the questions (hopefully the right questions!) to ask yourself.  Here we go:

What's your life expectancy (and your spouse's)?  You might begin by looking at a mortality table (the Social Security Administration offers one at www.ssa.gov/OACT/STATS/table4c6.html ) to see what the average is for some one of your age and gender.  Of course, you are not average, and other factors to consider include your current health, how healthy a lifestyle you are currently living, and the longevity of your parents and grandparents. (See the BBRC section on Your Health for more on health issues).  So it's not an easy question to ask but obviously the number of years you live in retirement has big financial implications.

How much of an estate do you want to leave to your children and/or charity?  Many people answer this question by remembering what they inherited but that might only be a guide or an input to your thinking.  Ultimately the issue of the legacy you want to leave behind is a highly personal question about your goals and aspirations.  The range of possible answers is enormous, ranging from a goal of spending everything in your lifetime and dying penniless to buying a huge life insurance policy that leaves your beneficiaries richer than you ever were.

What will the inflation rate be during your retirement?  Perhaps a milder, more easily answered question is "How do you feel about inflation?"  Are you bearish or bullish?  Do you want to protect yourself against erosion of the purchasing power of your savings, or in the face of inflation do you simply want to cut back on your lifestyle?

How much will I collect from Social Security (see article on Social Security)?  This is one of the easier questions to answer because by the time you hit your late fifties you can pretty much calculate it.  On the other hand, you have choices: do you start collecting a reduced amount at age 62, wait until you hit the official retirement age of 66 and collect more, or even defer until 72?

How much do I have in savings and investments and how much can I reasonably withdraw each year (see article on Investment Income)?

How much will I spend in my retirement (see article on Forecasting Your Expenses)?

How volatile is my investment portfolio (see separate section on the BBRC website about Investments?