When planning for retirement, several important factors determine whether your financial plan will work over the long term. Three of the most important areas people need to think about are understanding their spending, knowing how their pension works, and accounting for inflation over time.

The following sections explore these topics in more detail.

Retirement Planning: When You Haven’t Tracked Your Spending

Planning for retirement is not a subject you dwell on every day until you realize it’s closer than you think. However, there are various components for you to consider when planning for your “golden years.” An important piece of this planning requires you to calculate your current spending so you can make wise financial decisions for your retirement years.

How much do you spend?

Some families track their spending using software, online tools, a homemade spreadsheet, or simple paper and pencil. If you have been tracking your spending, congratulations! You have some solid spending history to use when estimating how much you will need to spend each year to pay your bills and do the things you want to do to enjoy your retirement.

What if you do not track your spending?

Many families that are easily able to pay their bills and accumulate healthy balances in their savings and investment accounts have never felt the need to track their spending. However, as they get within a few years of retirement, they realize they do not have any spending history to use for projecting whether they can afford to retire soon. They do not know if their investments will provide enough income to support them with the same lifestyle they have always enjoyed. Fortunately, there is a solution.

How to calculate your current spending?

Before you decide to turn off your income from employment, you want to be confident that you know how much money you need for retirement. What you don’t want to do is not have enough income at the time of retirement to provide for you and your loved ones. Therefore, it is best to use pure facts when calculating your current spending.

1. You make A.
2. You give B to the government for taxes.
3. You save C.

The rest is what you spend.

A – B – C = what you spend

It’s that simple. Don’t let the fact that you have not been tracking your spending delay your retirement planning. You can use this simple calculation to estimate how much you spend currently. And track your spending going forward so that you can more accurately estimate your spending needs in retirement.

Tracking your monthly spending today is important to do in the last few years before retirement. If you haven’t started, it’s okay. Start now. When you have an accurate picture of your expenses today, you’ll be better off in your future.

Retirement Planning: What Do I Need to Know About My Pension Plan?

Understanding your retirement income sources is another key component of retirement planning. For those fortunate enough to have a pension, it is important to understand how the plan works and what choices you may need to make when you retire.

The following article explains some of the important things to know about pension plans.

When you retire, your paychecks will stop.

But you want to have fun.  You have been putting off so many things, thinking “When I retire, I am going to {fill in the blank with that thing you really want to do, but have to put off until you have more time }”.   How will you pay for retirement if you are not getting a paycheck?

That is where retirement planning comes in.

The idea is to make sure that the nest egg you have accumulated, plus income from sources like Social Security and pensions, will be able to pay for your expenses in retirement.

I have written about expenses to consider in retirement.  If you are fortunate enough to have a pension, let’s look at a few tips to help you when gathering information about your pension to prepare for retirement planning.

Where to find information about your pension

Information can be found in the Summary Plan Description for your pension.  It can usually be found on the website for your pension or from your human resources department.  Or if you are in a union, talk with your union representative.

What kind of plan is it?

Is this a pension or a cash-balance plan?  A pension is not portable; if you leave your employer, then the pension will stay with the employer until you are of retirement age.  If it is a cash-balance plan and you leave, it is portable; you may keep it with the employer or roll it into an IRA.  There are other differences as well.  Consult your Summary Plan Description for the details of your plan.

Important ages or milestones for your pension

Knowing what ages or milestones are significant for your plan may impact your decision about when to retire.  Keep in mind, this could also be a combination of your age and years of service.

• Find out the age at which you become fully vested in your pension.  Vesting means that you keep contributions made on your behalf by your employer.
• Find out the earliest age at which you could retire with a pension.
• Find out the age at which you get your full benefit; any benefit taken before that age will be a reduced benefit.

How can you get your money?

Each plan has different options.  Find out what your plan offers.  Can you get a lump sum?  Can you take a partial lump sum and the rest in monthly payments for the rest of your life?  Does your plan offer a survivor option so that if you pass away, your spouse will still receive an income?

Is there a Cost of Living Adjustment?

A Cost of Living Adjustment, or COLA, would mean that the monthly payment would go up each year to adjust for inflation.   This is an unusual benefit; most employers do not offer this on their pension plans.  Many union plans do.  The Missouri Teachers’ pension is an example of a pension that has a COLA.  If your pension has a COLA, find out how yours works.

How much money can you expect?

This is the fun part of the information gathering exercise: finding out the estimate of how much money you would get at retirement.  There is usually a website where you can run pension benefit estimates; if not, then talk with your human resources department or union representative.  Find out pension benefit estimates for the age at which you would like to retire and the age at which you get the full benefit.

Also, look at other ages so that you can compare the amounts based on different retirement ages.

Does your pension plan set a maximum benefit?

What does it take to max out the pension?  Can you buy credits to increase your pension payment?

Investing time now in understanding your pension will reap rewards in retirement, allowing you to make the most of your benefit.

Retirement Planning: Inflation and the Jetsons’ Car

Even if you have estimated your spending and understand your pension benefits, there is another critical factor to consider when planning for retirement: inflation. Over long periods of time, rising prices can significantly affect how far your money will go.

When I teach retirement income planning classes, I love to ask attendees to jot down how much they paid for their first house, then I ask them to write down how much they paid for their last car. While I don’t ask them to share these numbers with the class, it does start a lot of discussion. And laughter. What usually comes out of this exercise is the fact that most of the retired folks in the room paid more for their last car than they did for their first home!

Inflation takes quite a toll on the wallet. We notice this happening as the price of items rise and rise over the years: milk, gas, property taxes, and, as in the example above, cars.

If you set up house at the age of 22 and retire at the age of 65, that is a span of 43 years. That gives you 43 years to earn income and invest for the future.

If you retire at the age of 65, how long do you want to plan for in retirement? Do you plan for a 90-year-old? 95? 100? Depending on your age, gender, health, and longevity in your family, retirement can last 25, 30, 35, or more years!

And if you plan on retiring early, you might be retired for as many years as you worked!

Let’s say you finish college at 22 and work until you are 62; you worked 40 years. If you live to 102, you would be retired for 40 years.

If you think inflation is a challenge while you are in your earning years, imagine what it is like during retirement when you are tapping into the portfolio that you created for retirement.

Here is some food for thought. Let’s take the car example from above and see what type of impact inflation has on car prices during your retirement years.

Last year and the first two months of this year, the Toyota Camry was the best-selling car in America. The 2012 Toyota Camry LE model has a base MSRP of $22,500 in today’s dollars. Not the least expensive model, the L, but not the more expensive models, SE or XLE, either.

Let’s use an example of a 55-year-old who is thinking of replacing their car every seven years in retirement. If the car sells for $22,500 now and inflates at 3% a year, they want to know what a Toyota Camry LE would cost at the following ages:

• At 65 years old, a 2022 Toyota Camry LE is estimated to be $30,238
• At 72 years old, a 2029 Toyota Camry LE is estimated to be $37,189
• At 79 years old, a 2035 Toyota Camry LE is estimated to be $45,738
• At 86 years old, let’s assume they are still driving, not as much as they used to, and mostly during the day, but their family insists that they have a reliable car, so they relent and end up spending $ 56,252 on the 2043 Toyota Camry LE.

If they maintain the car well and don’t put a lot of miles on it, they could look to knock off a quarter to a third of the price with a trade-in if they are trading in every seven years.

What if your tastes run more toward Lexus than Camry? Let’s look at this example with the 2012 Lexus GS (again not the most expensive model, nor the least expensive) with a base MSRP of $46,900 in today’s dollars.

Let’s use the same example of a 55-year-old who is thinking of replacing their car every seven years in retirement. If the car sells for $46,900 now and inflates at 3% a year, they want to know what a Lexus GS would cost at the following ages:

• At 65 years old, a 2022 Lexus GS is estimated to be $63,030
• At 72 years old, a 2029 Lexus GS is estimated to be $77,519
• At 79 years old, a 2035 Lexus GS is estimated to be $95,338
• And at 86, in this example as well, they listen to their family and buy a new car so they have a reliable car, making the family feel better. They end up spending $ 117,254 on the 2043 Lexus GS. The good news is, the year is 2043, so it is the Jetson’s edition, so it can fly.

In discussing plans with families, I find that car replacement during retirement years is the most frequently forgotten item when individuals plan on their own. But having read this, you know to factor it in. Many people make the mistake when planning by assuming that they can keep the same car throughout retirement.

Keep in mind that you may be retired for almost as many years as you were working. Think about how many cars you owned while working, and consider if it would be realistic to have one car for a period approximately as long as that. You will possibly be driving more in the early years of retirement, because retired people are the busiest people I know. They have been putting off all the things they wanted to do; now they get to do them!

But the amount of driving does slow down significantly in the later years for most, but not for everyone. Also, consider that if you have more than one driver, you may be replacing more than one car in retirement. Forewarned is forearmed! If you haven’t already, be sure to account for car replacement and the inflation of car prices in your retirement projections.

In Closing

A successful retirement plan considers several interconnected pieces:

• Understanding how much you spend today

• Knowing how your pension and other income sources work

• Accounting for the long-term effects of inflation

When these elements are considered together, it becomes much easier to create a retirement plan that supports your lifestyle for decades.