If you think you can live in retirement on half of what you're earning on the job, try it and "see what you have to give up."
Sandra Block, an editor at Kiplinger's Personal Finance, offered that as one strategy for calculating your needs after you retire. She said online retirement calculators can help, especially if you're getting close to retirement age. But the best advice may be to be conservative about estimating the amount you'll earn on investments and to prepare for trouble, like a recession, along the way.
In an interview with Kerri Miller on The Daily Circuit, Block offered these tips:
• Try several retirement calculators. "There are just so many of them out there, and it's interesting sometimes to see the different outcomes that you get."
• Expect a low return on your investments. "I think you should lowball it, because the worst that happens then is that you end up with more money than you need. So I would say 5 to 6 percent. ... In retirement, you're not going to be shooting the moon with your investments. You're going to have a certain amount of your savings in a very safe place because you're going to need access to it."
• Plan to weather a storm. "The best way to avoid being totally hammered by another recession is to have two or three or more years of expenses in a super-safe place that will not be hit by a stock market downturn. That means you're not going to earn very much money off of it."
• Don't assume you will live cheaply. "A lot of financial planners say there's not going to be that much of a difference. That's sort of a self-evaluation you have to do about what you expect your lifestyle to be in retirement. There have been a lot of studies that show early in retirement people spend as much or sometimes more than they spent while they were working. They're still young, they're feeling good, they travel. And so many retirees now are carrying a mortgage into retirement. So that's not going to disappear. The conservative option is not to expect your expenses to drop dramatically, and then you'll be pleasantly surprised if they do."
• Pay off your mortgage, if you can. "I think it's a good idea to get rid of your mortgage for retirement. But you shouldn't put off retirement savings or paying off debt to pay off a very low-interest mortgage. To me, the middle ground is to prepay. Don't exhaust all of your cash to pay off a mortgage where you're only paying 3 percent interest. But make an extra payment a month, or increase your monthly payment, so you can wind it down. Maybe try and time the payoff for when you plan to retire. ... If you have a year like 2008, where your market portfolio gets hit 25 percent, but you don't have to take any money out to pay the mortgage, you're going to be in a lot better shape to ride that out."
• As your expenses begin to fall, build up your savings. "For people in their 50s, this is a time in their life when they do have the ability to put more away. Maybe your kids are out of college, so the money you were paying for tuition, you can divert toward retirement savings. Maybe you have paid off your mortgage, and you can start diverting that to your savings, or paid off your car ... even getting rid of cable or an expensive cell-phone contract could make the difference between increasing your retirement savings and not."
• Resist the temptation to take Social Security early; the payments will get bigger the longer you wait. "You just couldn't buy an annuity that would give you that kind of payout."