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When it comes to retirement, most people have as their fundamental goal to maintain their lifestyle, or what I call their Standard of Individual Living (SOIL). But, just what is your lifestyle today? How do you measure it?
The old fashioned way was to meticulously budget and track expenses. There’s an easier way! Your bank statements already give you the bigger picture without all that detail (detail may come later IF you wish). Here’s the objective and method of the Bank Statement Approach to quickly (faster than meticulous budgeting) determine your present lifestyle.
For those still working, now that you know your Lifestyle SOIL, when can you retire? By evaluating when everything lines up so that your retirement lifestyle matches your working lifestyle. That is accomplished through a Retirement Feasibility Timeline.
For those already retired, understanding the statistics of longevity is critical to now outliving your money. As you get older, you should expect to live to an even older age than you expected to live to when you were younger. What does that mean? A 65 year old might expect to live past say age 88. But, at age 85, you might expect to live past age 97. Note I say “live past,” because life expectancy are percentile ages (the median or “life expectancy” is the 50th percentile). Which means that a percentile of those in any given age and sex group outlive that percentile age!
An analogy to better visualize what age and life expectancy are. Imagine the bow of a boat being your present age. There’s a bow wave in front of a moving boat – where that bow wave ends in front is the life expectancy. As long as the boat keeps moving, there’s always a bow wave in front. The bow wave stops when the boat stops (death). As long as your alive, there’s a statistical older age from the longevity tables that you may live to, and even past (outlive). A strategic use of longevity table percentiles leads to ever increasing ages that you are more and more unlikely to outlive.
Thus, it’s a rolling time problem, not a set and forget problem. More on this concept here: What age should you plan retirement to?
For both groups above, there’s an Insidious Impact of Lifestyle Creep that’s possible where spending outstrips what prudent spending should be.
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