Greetings! I hope and trust that this finds you well and enjoying life.
Many Americans realize the how important it is to save for retirement, but knowing exactly how much you need to save to be secure is another matter entirely. Everyone’s situation is unique and it’s sometimes challenging to determine what’s appropriate for your specific situation.
One common rule of thumb from the experts is that retirees will need approximately 80% of their pre-retirement salaries to maintain their lifestyles in retirement. However, depending on your own situation and the type of retirement you hope to have, that number may be higher or lower. Here are some factors to consider when determining a retirement savings goal.
The first factor to consider is the age and when you expect to retire. In reality, many people anticipate they will retire later than they actually do. Unexpected issues, such as health problems or workplace changes such as downsizing or the need to care for an elderly relative tend to take precedence. It’s important to prepare for anticipated occurrences that could force you into an early retirement. Of course, the earlier you retire the more money you will need to last throughout retirement.
Although you can’t know what your actual life span will be, a few factors may help in your planning. You should take into account your family history, in regards to longevity, as well as your own past and present health issues. Also consider that life spans are becoming longer with recent medical developments. In fact all medical knowledge doubles every seven years. More people will be living to age 100, or perhaps even longer. When calculating how much you need to save, you should factor in the number of years you expect to spend in retirement.
Another factor to consider is the cost of health care. Health care costs have been rising much faster than general inflation, and fewer employers are offering health benefits to retirees. Long-term care is another possible need. These costs could severely dip into your savings and deplete your retirement nest egg faster than you anticipated.
Another important fact to consider is your desired lifestyle in retirement. Are there any hobbies you would like to develop? Do you want to travel? Are you planning to be involved in philanthropic endeavors? Will you have an expensive health club membership? The answers to these questions can have a major effect on the necessary balance of your retirement nest egg.
Many people expect and plan that they will work part-time in retirement. However, if this is your intention and you find that working longer becomes impossible, you will still need the appropriate funds to support your retirement lifestyle.
If you think you have accounted for the necessary factors when constructing a savings goal but forget this vital influence, the integrity of your savings plan could be in jeopardy. Inflation will lower the value of your savings from year to year, significantly reducing your purchasing power over time. It is important for your purchasing power to keep pace with or exceed inflation.
Many persons planning for retirement believe that they can fully rely on their future Social Security benefits. However, this may not be true for you. The Social Security system is under increasing strain as more baby boomers are retiring and fewer workers are available to pay into the system. And the reality is that Social Security replaces only about 40% of an average wage earner’s income after retiring. That leaves 60% to be covered from other sources.
After considering all these factors, you should have a much better idea of how much you need to save for retirement so let’s look at an example.
Let’s assume you will retire when you are 65 and spend a total of 20 years in retirement, living to age 85. Your annual income is currently $80,000, and you think that 75% of your pre-retirement income ($60,000) will be enough to cover the costs of your ideal retirement, including a hobby you want to develop and some traveling in the U.S. After factoring in the $16,000 annual Social Security benefits you expect to receive, a $10,000 annual annuity benefit you purchased, and 4% potential inflation, you end up with a total retirement savings need of about $800,000.
The estimated total for this hypothetical example may seem daunting. The important thing is to come up with a goal and then develop a strategy to pursue it. Once you get started you may find the process easier than you thought. You don’t want to spend your retirement years wishing you had planned ahead when you had the time. The sooner you start living and investing to reach your goal, the closer you will be to realizing your retirement dreams.
I’ll close with the words from the philosopher Goethe….
Are you in earnest? Seize this very moment.
What you can do or dream that you do begin it.
Boldness has genius and power and magic within it.
Only engage and the mind becomes heated.
Begin and then the task will be completed.
If you have questions about the above or any retirement related issue give us a call.
Jeff Christian CFP, CRPC