“How much money do I need to retire?”
I can’t tell you how often I get that question from existing and prospective clients. It’s a reasonable thing to wonder about. Most of your retirement planning centers on the idea that you need a certain amount of money to retire comfortably - and that the figure you have in mind will remain stagnant throughout your retirement process.
A cursory look through Google search results will show you a wide range of answers. Some will say having a nest egg of somewhere between $1-1.5 million is sound advice. Other articles will tout an equation that multiplies your income by 10-12. However, the answer is much more complicated than a simple number or equation. To effectively calculate how much money you need to retire, you need to start with a retirement budget.
What's Your Cost of Living?
The first thing I encourage people to look at is their estimated cost of living during retirement. It’s smart to assume you’ll live similarly as you do now. Although, you might find your expenses fluctuate over the course of your retirement. On the front end, you may be doing more travelling, eating out, and enjoying being newly retired - which will increase spending. On the back end, you may end up spending more on unforeseen medical costs, which will also increase your spending.
To account for all of this, you can write out your current living expenses and build in a “buffer” amount for things like travel, long-term care and medical bills, etc. You may be surprised to find that the number is more reasonable than you imagined, but be careful. While many people assume they’ll spend less in retirement (which is the basis of an ever-popular “70-80% rule”), it’s easy to fall into the trap of overspending. To help avoid overspending, it’s wise to set a budget and cut any unnecessary expenses now while there’s still consistent income coming in.
Cutting down on expenses now can help you to remove unnecessary spending during retirement and refocus your spending on more enjoyable things - like travel or other unique experiences.
One easy way to ditch a few lifestyle costs is to work toward paying down debt now. Whether you’re still paying down your mortgage, loans, or credit card debt - focusing your energy on paying it down before you retire can be immensely helpful. You can also look to downsize your living space to either lower or eliminate your mortgage payments.
Don’t be afraid to think outside of the box, here. Just as you’d eliminate spending in a pre-retirement budget, getting serious about intentional spending post-retirement can help you get a handle on how much money you’ll actually need.
Don't Underestimate Medical Expenses
A common mistake people make is underestimating their medical expenses during retirement. While you may be healthy as a horse now, things inevitably crop up as we age. Fidelity Investments tracks retiree health care costs, and has been for over 10 years. Per this research, AARP reports that the average amount that a 65-year-old couple will spend on medical expenses during retirement is $240,000.
That number may seem unrealistically high. But the truth is, even if you face no out of the ordinary costs, your premiums, copayments, prescription drugs, hearing aids, glasses, and other every day medical costs can easily comprise most of that $240,000 quoted figure. Medicare will certainly help, but it’s coverage is still limited. So, to be safe - overestimate how much you’ll spend on medical costs. Then work this into your retirement budget. It’s always better to be over-prepared when it comes to your health.
When building a retirement budget, it’s tempting to use a cookie-cutter template. While this might work in order to get the ball rolling, it’s important to dig a little bit deeper and decide what kind of retirement you want. We live in an incredible time where the options for how you want to spend your retirement are truly endless. A few things to consider are:
How Much is Coming In?
In order to get a better understanding of how much you need to save for retirement, you’ll also need to know how much money you can count on coming in during your retired years. Two things you might consider as part of your retirement income are Social Security and a pension (if applicable).
To calculate how much money you’ll receive from the Social Security Administration, you can use an online calculator (like this one from AARP) or pull your Social Security Statement directly from the SSA. It’s important to note that you shouldn’t expect Social Security to make up a large portion of your retirement income.
What’s Your Number?
Once you know your estimated cost of living, have set a budget, and are aware of the funds from any SSA checks or pension you might receive, you’re better prepare to set a retirement savings goal for yourself. If you’re feeling daunted by the final number you’ve come up with, you’re not alone. Approximately 50% of all Americans have nothing saved yet for their retirement.
The good news is it’s never too late. I’d love to help you put a plan together to set a savings goal, build a retirement budget, and start working toward your best retirement. Set up an obligation-free consultation today to get started.
Remember that good financial planning is, by definition, good retirement planning.
Tony Velasquez is the Founder and Managing Director of Wisely Advised an Illinois Registered Investment Advisor. Wisely Advised provides comprehensive financial planning and investment advisory services to both individual and business clients. You can learn more about Tony and his firm here.
Tony Velasquez runs Wisely Advised, LLC a full-service Registered Investment Advisory Firm offering comprehensive financial planning and investment advisory services to individuals, families, and businesses.
Whether it's traveling, being at the beach, or at his family's ranch in Texas, Tony loves enjoying time with his family and friends.