How much money will you need when you are ready to retire? That’s a tough question. For many people, it’s like asking, “How high is up?” However, retirement planning is a lifelong pursuit, and in order to achieve your retirement goals, you need to have a target in mind. Even if the goal changes over time, having an objective will tell you if your retirement planning is on track.
Americans tend to underestimate their retirement needs. According to a survey by Natixis Investment Managers, two-thirds of those surveyed believe they have enough saved for retirement, or will have when the time comes. However, the average saver is only putting 6.8 percent of their income into a workplace retirement account such as a 401(k), and 27 percent of Americans have borrowed against their retirement funds and paid early withdrawal penalties. According to the Stanford Center on Longevity, you need to start saving between 10-15 percent of your income starting at age 25 if you plan to retire by 65.
How do you calculate your real financial needs for retirement? There are a few ways to answer that question.
Get Real About Retirement Costs
When most people think about their retirement needs, their estimates are low. Their mistake is thinking that their cost of living will be substantially lower in retirement. They also fail to consider factors such as inflation and the rise in the cost of living. According to the Employee Benefit Research Institute, 37 percent of retirees found they underestimated retirement costs, and 44 percent said their bills were higher than anticipated.
Most experts say that you will need 70-80 percent of your present income to live comfortably in retirement. The rationale is that when you retire, you will no longer be putting away that 10-15 percent of your income. Plus your taxes will be lower and you will be saving on costs such as commuting to work.
According to Charles Farrell, CEO of Northstar Investment Advisors and author of Your Money Ratios: 8 Simple Tools for Financial Security at Every Stage of Life, you should plan to have 12 times your annual income in savings if you want to retire at age 65—so if you were earning $100,000 per year, you want $1.2 million in retirement savings. Farrell has included Social Security benefits as part of his calculation.
To get a general idea of what you need to save for retirement, you could use a retirement calculator. There are a number of online calculators that will provide some basic projections based on income, the amount you need to save, and when you plan to retire. Of course, these calculators will only give you a rough idea of how much you need to save.
To accurately calculate how much money you need to retire, you need to do the math. Calculate exactly what you expect your monthly living expenses to be, including housing, healthcare, utilities, food, and anything else you can think of. Be realistic about your retirement budget and consider costs such as dining out, visiting the grandkids, or having extra cash if your children need it. Also consider adding in extra savings for unanticipated expenses, and rethink your healthcare costs; according to Fidelity Investments, a healthy 65-year-old couple can expect to pay $280,000 in medical expenses that are not covered by Medicare.
What’s Your Retirement Plan?
Before you can calculate what your monthly expenses, you have to make some determinations about your retirement budget. How do you want to live in retirement?
Make a list of your retirement goals. This will help you create a realistic retirement budget. For example, when do you plan to retire? Many people want to retire at 55, but for most people, that means having the means to pay for four decades of living expenses. According to Charles Farrell, you will need 18 times your annual income, assuming a 4 percent annual withdrawal rate adjusted for inflation—e.g., if you earn $100,000 per year, you need retirement savings of $1.8 million.
Also consider where you want to retire. If you are dreaming of a beach house in Hawaii, you have to calculate in the higher cost of living. If you plan to move to a less expensive area, consider how that will impact living expenses. For example, if you sell your home, will you be able to afford to buy a new home or is renting a better option?
What about your retirement lifestyle? Do you plan to take up gardening or are you planning to travel? Maybe your dream is to spend more time playing golf. Whatever your plans, calculate in the costs of enjoying your retirement.
You may plan to continue working into your 70s. More people are continuing to work rather than retiring. However, just because you continue to work doesn’t mean you will continue to earn at your present salary. According to Payscale, your peak earning years are in your 40s and 50s, and your earning power starts to drop as you reach retirement age.
How to Meet Your Retirement Goals
Now that you have drawn a comprehensive picture of your retirement, you can start developing a realistic retirement saving plan. If you save 15 percent of your income, will that be enough to achieve your goals? One popular way to determine your budget is the 50-30-20 rule—50 percent of your income for needs, 30 percent for wants, and 20 percent for savings. If you can save 20 percent for retirement, do you still expect a shortfall?
As part of your retirement planning, be sure to use all the tax-advantaged savings tools available. Maximize your 401(k) retirement plan at work. Contribute to an individual retirement account (IRA). Use investments to earn more on your retirement savings.
If it still looks like you aren’t saving enough, you can try to save on your monthly bills and put the additional savings into your retirement fund. You also should revisit your retirement plan and make adjustments for the anticipated cost of living.
Creating a realistic retirement strategy is not easy, but you don’t have to do it by yourself. You can consult a financial advisor to help you make the most of your retirement savings. First State Community Bank has financial professionals on staff who specialize in retirement planning. Why not contact us today so we can help you get your retirement plan on track?