If you’re pretty certain you’d like to tap your home’s equity to help with retirement, consider how much equity you would use.
Setting Up a Couples Plan
When beginning your retirement planning, make sure if you are married that you sit down with your spouse and coordinate your individual plans. Doing so may seem obvious, but it’s an important step. Discussions about retirement plans need to begin long before retirement. Even when one spouse is doing most of the financial planning for retirement, both spouses need to have a meeting of the minds over the nonfinancial aspects of their senior years. And the spouse who is not doing as much of the financial planning still needs to know the overall financial situation.
There are some topics couples should begin discussing at least five years before retirement:
Should each of you retire? If so, when would each prefer to begin retirement?
Would retirement be complete, or is part-time work a possibility for either spouse?
Where will you live during retirement?
How will each of you spend nonworking time during retirement? What things do you anticipate doing together and which will you do separately?
Have you estimated how much money you will need to support your retirement plans? If so, how much will you need and how close are you to having it?
What is the plan for spending your retirement funds, and what is the plan for investing the funds?
What assets and accounts do you own, where are they, and how are they invested?
What legacy do you hope to leave? Is there a plan for fulfilling that goal?
What is your estate plan and where are the documents?
What role will children, grandchildren, and parents play in the rest of your lives? Will you move to live near either adult children or aging parents? Do you plan to help or support either of them if needed? If this is a second marriage for either spouse, what are the plans for any children of the prior marriage?
What is the attitude of each of you toward aging, and how do you expect to react to it?
Crunching the Numbers
For purposes of retirement planning, what matters most is where you stand today as far as reaching your goal. So, you need to crunch some numbers to get a handle on your situation. One of the best ways to do so is to use available retirement calculators, either online or with a hard-copy workbook. These resources can walk you through the calculations needed to figure how much you should be saving to reach your retirement goal. The information you collect and the questions you answer earlier in this chapter allow you to hit the ground running with the number crunching.
Among the mass market website retirement planning tools and booklets, we like T. Rowe Price’s. Visit www.troweprice.com for the online version or call 800-638-5660 for the work booklets.
www3.troweprice.com/ric/ricweb/public/ric.do) is a user-friendly tool, and the website says it takes about 10 minutes to complete. If you’re organized and have your documents handy, you may cruise through it that quickly, but otherwise you’ll more than likely need 20 to 30 minutes.
In the following sections, we walk you through steps for using the T. Rowe Price retirement planning tools to get a better assessment of your financial numbers as you prepare for retirement. We use T. Rowe Price as an example, but please note that you can select another company’s tool if you prefer.
Understanding assumptions and how they work
If you use a retirement calculator online, make sure you’re aware of the different assumptions used. This section details those assumptions.
In this section, we specifically look at the T. Rowe Price assumptions and online calculator. In order for you to be able to make the best use of this site, we review the following important key assumptions. If you choose not to use this online tool, you can use the discussion of the assumptions that follow for other retirement planning tools.
Asset allocation: The calculator asks you to enter your current allocation (mix of major investment classes) and then to select an allocation for after you’re retired. For the allocation during your actual retirement, Price’s Retirement Income Calculator defaults to a fixed 40 percent stock, 40 percent bond, and 20 percent money fund. Alternatively, you can enter in your own preferred allocation in retirement. For most people, we would generally recommend something more aggressive, but presumably less aggressive than your mix during your late working years. The calculator doesn’t include real estate as a possible asset. If you own real estate as an investment, you should treat those assets as a stock-like investment when calculating your current asset allocation, because they have similar long-term risk and return characteristics. You should calculate your equity in investment real estate.
Age of retirement: For this assumption, you plug in your preferred age of retirement, within reason, of course. (For example, plugging in age 53 is pointless if you’ve selected that age knowing that the only way to accomplish that date is by winning the lottery.) Depending on how the analysis works out, you can always go back and plug in a different age. Sometimes folks are pleasantly surprised that their combined accumulated resources provide them with a high enough standard of living that they can actually consider retiring sooner than they thought.
Social Security: The T. Rowe Price calculator asks whether you want to include expected Social Security benefits. We’d rather that the calculator didn’t pose this question, because you definitely should include your Social Security benefits in the calculations. Don’t buy into the nonsense that the program will vaporize and leave you with little to nothing from it. For the vast majority of people, Social Security benefits are an important component of their retirement income, so do include them.Based on your current income, the T. Rowe Price retirement program will automatically plug in your estimated Social Security benefits. So long as your income hasn’t changed or won’t change dramatically, using their estimated number should be fine. Alternatively, you could input your own number using a recent Social Security benefits estimate if you have one handy. See the section, “Social Security retirement benefits” earlier in this chapter.
After you enter your personal information and decide on the preceding assumptions, you’re ready to finish the calculations on the T. Rowe Price website. Price’s completed analysis shows how much you can live on per month and then compares that with what your stated goal or amount was. The calculations include doing 1,000 market simulations, and it works 80 percent of the time. (See the nearby sidebar “Monte Carlo retirement simulations” for a more detailed explanation of this type of modeling, if you’re interested.)
