Retirement planning using cash flows

The question comes up often as to what amount is needed to retire.  Money in the bank and diversified assets are indeed important, but the critical measurement of what gets you buy on a daily, monthly, and yearly basis is your income.  For most, a retirement will be short lived if you live off of only the cash that you have on hand.

Ideally, your retirement income will come from multiple robust sources.  This will act as a hedge against having your income collapse in the event of adverse conditions.  Social Security may play a part in this, however, if it plays a substantial part for your retirement planning, you are likely short of what you truly desire for income in retirement.  So, how much is needed?

The current median income in the top quintile is currently $111,000 a year.  This means that this income is higher than 90% of all American households since it is in the middle of the top quintile (80% to 100%).  If your income is $111,000, first of all congrats on the hard work.  Second, your current lifestyle in retirement can be sustained on less.  The amount required is about 50% as work related expenses, commuting costs, and taxes at the new 50% income will decrease.

Now the question becomes, how is a retirement had at $55,500 per year?  To answer this there is a simple formula that FPO has developed as a starting point as well as a personal goal to shoot for.  This amount can be met by accumulating nine buckets of $500 extra income per month as described in the four part FPO series (1, 2, 3, 4) on creating extra income.  At least seven of these buckets must come from income generators in the first three parts, with two being permitted to be from part 4.  More than 2 from part 4 is welcome, however the effort to create additional savings would not be beneficial at the expense of achieving that seventh bucket.

>>> When broken down like this, seven buckets seems achievable, right?  Of course it is, but it is never explained like this.  Many financial experts frame a funded retirement as something that only the most disciplined can achieve, and that it is some sort of lofty goal.  In reality, it is easier than advertised when broken into chunks.  However, expect that it won’t happen overnight.  But aim for creating one of the seven every five years and you’re set.  Start at 25 and retire at 60.

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About Steve @ FPO
Hello FPO readers, I have been writing on financial topics for about 12 years now, but I have only recently reignited the fire of publishing online. I have to say, its good to be back. I am an electrical engineer by trade who enjoys all topics engineering and financial. I started Financial Place Online (FPO) to create a value added financial news and education website that would provide a refreshing daily financial read. Financial Place Online websites are built around the principles of consumer empowerment, leveling the playing field, zero spam tolerance, and none of those annoying sidebar or banner ads. For us, it's all about enjoying a good read.

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