BEFORE RETIREMENT Income/Expenses Savings Calculations INVESTMENTS Criteria Stocks

Income and Expenses Income: Your annual income should increase at approximately the rate of inflation over the remaining years of employment. Some people will do better than this, some will not do as well. For our purposes, the average will be sufficient. Expenses: Your annual expenses will decrease in retirement by about 35% on average. Why ?  Because you no longer will be saving 10+% of your gross salary,nor paying 6+% into Social Security. Also, you will be in a lower income tax bracket (a big change) and will no longer require business suits, ties, (or dresses), shoes, etc.. There will also be less need for a new car every few years, (no driving to work), the house note should be paid off, and hopefully all the kids have graduated and have left the nest. Sample Calculation: To best understand these effects we will go through a sample calculation for a typical family of two, looking at income, expenses, and savings. We will calculate: yearly income the year before retirement yearly expenses the first year of retirement and yearly expenses through the first 25 years of retirement Basis and Assumptions The calculations will be based on the following assumptions: Family: husband, age 45; wife, age 43; children, doesn't effect the calculations. Retirement: when husband is 65 years old. Wife retires too, at 63. Inflation: assumed to be 3.0 %/year compounded rate both before and after retirement. Salary at present: assumed to be $40,000/year. Inflation Factor Table: Before starting calculations, we need an Inflation Factor Table. This table illustrates how costs can escalate with years, even for a low inflation rate of 3.0 %/year. Equation 1 Fn = (1 + i )n Where: Fn = the inflation factor for n years n = number of years i = inflation rate Inflation Factor - Table 1 years = n 0 1 4 5 9 10 14 15 19 20 24 25 Fn = (1.03)n 1.00 1.03 1.13 1.16 1.30 1.34 1.51 1.56 1.75 1.81 2.03 2.09   Income at Retirement: Future income can be estimated from today's income by adjusting for the rate of inflation. Equation 2 In = I0 * Fn Where: In = income in year n (at retirement) I0 = income in year 0 (today) Fn = inflation factor for n years(Equation 1 or Table 1) For the case where todays Income = $40,000 (abbreviated as 40k) and years to retirement = 20 I20 = 40k * F20 I20 = 40k * 1.81 = 72.4k Your Calculated Income:Now, here is an applet for you to estimate your specific income the year before retirement. Just input your numbers and then press Enter. Expenses in retirement:Expenses in year one of retirement is assumed to to be 65% of the final income before retirement. Equation 3 E0 = I20 * 0.65 E0 = 72.4k * 0.65 = 47.0 Future years expenses in retirement will raise at a rate slightly less than inflation. For these calculations I have assumed a rate only 2/3 as rapid, i.e., a 2.0 % rate. Equation 4 En = E0 * F(n - 1) E5 = 47k * 1.10 = 52k E10 = 47k * 1.22 = 57k E15 = 47k * 1.34 = 63k E20 = 47k * 1.49 = 70k E25 = 47k * 1.64 = 77k Your Calculated Expenses:Now, here is an applet for you to estimate your specific expenses after retirement. Just input your estimated final year's salary from the applet calculations above, then press Enter. As you can see, Your income will rise significantly with inflation over 20 years. Your expenses drop initially (assumed to be a 35% drop) But again, inflation drives your expenses (required income) back up with time. See the section on Savings for information on how to be prepared for these escalating costs.

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