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Archive for August, 2010

Making the Decision to Retire

August 19th, 2010 at 06:09 am

How much money will I need to retire comfortably? This was the burning question I pondered for several years before retiring. My retirement planning involved some specific steps to answer this question and it helped me feel confident in my decision to retire. Even though I retired two years ago when the economy was imploding, I have not regretted it for a moment.

Here is what I did to come up with my answer:

1. I determined the annual income I would need in today's dollars. This involved creating a budget that allows for unexpected expenses and also a healthy amount for travel. My basic budget categories are:

Housing (includes expenses for second home)
Utilities (includes phone)
Food/Misc.
Auto (gas, maintenance, insurance, registration)
Medical
Charitable Donations/Gifts
Personal Allowance (includes clothing)
Insurance
Entertainment
Travel Savings
Regular Savings
Taxes

2. I chose my planned retirement date: August 19, 2008.

3. With input from my accountant and financial planner, I analyzed the market value of my investments. These included both taxable (cash, stocks, real estate) and tax sheltered accounts (IRAs, 457 and 403b). Taking into account a conservative rate of return on these investments (2%), we projected values at 70 1/2, when Required Minimum Distribution (RMD) kicks in.

4. I requested a benefit estimate from my state teacher's pension plan. In my case, I knew the exact amount of my pension and that it is supposed to have a guaranteed 2% annual COLA.

5. I calculated the withholding on my pensions at approximately 25%.

6. I determined my pension WOULD NOT keep pace with inflation (using a 4% lifetime average inflation rate). In the future it would mean saving less and/or drawing from my retirement accounts to supplement my pension income (definitely will need to do so by age 70 1/2).

I put all this data on a spreadsheet and saw that I could afford to retire on my chosen date, even though waiting three more years would have provided a significantly higher income. In my case, the additional money was not worth the stress generated by my work. My job as an elementary school principal was taking a toll on my health (e.g., high BP) and I wanted to retire on a high note, rather than after I'd burned out.

These are the steps I took to "crunch the numbers." There are plenty of calculators available online, some of them very useful. However, I just used a simple Excel spreadsheet. I did this exercise at least once a year for about 4-5 years before retiring. I knew it was time to retire when I began to review my retirement spreadsheet every month!

My husband retired in 2009 so we are now both able to enjoy a completely different life. People sometimes ask what we do to keep busy now that we're retired. The reality is that we are always busy, but what we do to keep busy is our choice. It's wonderful to have so much control over our lives. We love to travel and have documented some of our adventures on our travel blog.

In addition to retirement income planning, we downsized in 2006 to a condo in Silicon Valley. This was a good move because we sold our big house when prices were high and we were able to move to the condo that we had bought in 2003 but had rented out. We used profits from the downsize to buy our Idaho home for cash, so there is no mortgage. So now here we are in beautiful Boise where we have relocated. We still have the CA condo, but it is now our second home.