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Retirement: Income Replacement and Cash Flow Planning

There has been much discussion and research about retirement income planning. The most commonly accepted concept is income replacement, which is replacing some percentage or all of the income you earned while working. You should determine what expenses you will want/need to cover if you want to calculate what you need for income replacement.

Most people want to have 100% of their working life income in retirement. But do they really need it? It is very beneficial to your plans to put hard numbers to what your lifestyle will cost in retirement. This is no more complicated than determining what your pre-retirement expenses are and then making adjustments. This will help you determine whether your retirement living will be less expensive or not.

Figure what living expenses will be fixed versus variable and which will be mandatory and which may be reduced or eliminated. You can then make adjustments to your retirement spending plans. Take into consideration that what you are budgeting for saving in retirement plans and IRAs may be eliminated if you don’t plan to continue contributing to them.

Start with the biggest investment and expenditure in most people’s budget: your home. Will you have your mortgage paid off? Will you sell your home and downsize to something smaller and less expensive? Moving to a retirement community will reduce or eliminate property taxes, insurance, and maintenance from your budget.

Consider how you will live in retirement. Will you travel a lot? Will you dine out more or less? Buying lunch daily while you were working may not happen in retirement. Clothing expenses may decline. Some insurance companies offer lower auto insurance rates for retirees. Do you have an expensive hobby or past time that will impact your living expenses?

You can count on your health expenses going up at some point as you get older. It is estimated that the average health expenditure for a retired couple is in excess of $250,000. Add to that the possibility of long-term care expenditures.

Going through the exercise of evaluating all of these expenses will give you something to plan for in your retirement years. The best time to do this is five to ten years before your planned retirement. However, if you haven’t started planning yet, then the best time is right now.

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