and why you need to invest.
You can retire when you can meet your spending needs. The guideline is 80% of your income. If you looked up your percent of income in my earlier post, you know the percent of income you will receive at any given year and if you can reach this.
Case Study
Let’s use me and my spouse(K) as case studies. I will assume no beneficiaries for each of us.
Me: at 60 I will have 35 years of credit and will receive 77% of my income. I won’t hit 80% until around 60.5 years old.
K: at 60, she will have 30 years of credit and will receive 66% of her income. She won’t hit 80% of her income until over 63 years old.
We ideally want to retire at between 58 and 59 years old in two to seven years, but would not meet the 80% threshold. We also plan to designate each other as beneficiaries which lowers our take home benefit as well.
The Gap
The difference between spending needs and your pension benefit is called your gap.
In our case above, I have a gap of 3% and K has a gap of 14%. We combine our finances so we have a 9% Gap (Average of the two).
Let’s translate that into dollars. As of this post, our district has a top salary of $115,000, so we would have an income of $230,000 combined at retirement. 9% of $230,000 is $20,700.
That means we would need to generate $20,700 a year to bridge the gap of 9%.
Bridging the Gap
There are lots of ways to generate the money. We could work part time for a while with the assumption that we will need less money later, or we could invest now to generate those extra dollars going forward.
The rule of 25 tells us that we would multiply our $20,700 gap number by 25 to determine our savings goal. $517,500 is the number we would need to save. That’s over a half million dollars!
Choices
The choices are work longer or invest more or reduce your spending in retirement. Personally, we are working on investing more as we don’t want to work longer and we want to spend more in retirement on travel and helping our kids with college and life.
While you figure it out start investing so you have more options.