In Part 1 posted on 3/4/10 we discussed the benefits of a reasonable lifestyle, both today and during retirement. So let me illustrate to you what I meant and the benefits of spending within reason. Notice how much someone needs at age 66 to support a much higher standard of living. I would call this “living within your harvest.”

To illustrate, let’s make the following basic assumptions for a married couple:
— Current age of 55 and Retirement age of 66
— Combined Social Security income of $2,400/month (in today’s dollars)
— Growth rate on investments of 4% post-retirement
— Retirement period of 19 years (live to age 85)
— Current inflation rate of 3% annually

Based on these assumptions, someone may need to have accumulated the following amounts at retirement (Source: American Funds retirement calculator):

Living Expenses during Retirement —- Amount Required at Retirement (age 66)
$6,000/month —- $1,066,488
$10,000/month —- $2,158,247

Keep in mind this is just for simple illustration purposes, makes common assumptions, and assumes no market volatility. In real life, change is frequent and retirement assumptions, rates of return, inflation, etc. can vary from year to year. Plus, it’s very common that individuals will experience some type of unexpected need during their retirement years (such as increased medical expenses)… requiring more savings or a lifestyle change. Remember, everyone’s situation is different and should be monitored closely by a financial professional.

So what do you think? Which spending level can you truly afford?

The above information is for illustrative purposes only and is not intended to provide investment advice or portray actual investment results. Your financial situation and goals may change, so you might want to revisit the American Funds retirement calculator at least once a year. Be sure to discuss your results with your financial professional. The above information does not take certain factors into account, including early withdrawal penalties, required minimum distributions and holding periods. Regular investing does not ensure a profit or protect against loss. Hypothetical annual rates of return are not intended to reflect actual results; your results may vary based on market conditions. The above information compounds earnings annually and assumes that withdrawals are made at the beginning of the year. To access the American Funds retirement calculator go to https://www.americanfunds.com/retirement/calculator/.