Most of us have daydreamed about retirement. You’ve thought about the trips you’ll take and the hobbies you’ll pick up with so much extra free time, but have you thought about how much money you need to save before you can retire? In the words of Zig Ziglar, “You can’t hit a target you cannot see, and you cannot see a target you do not have.”
If your retirement is based on how much you have saved, then there’s no simple, one-size-fits-all answer. With a little bit of planning and strategic thinking, you can reach a fairly solid estimate for how much you should save.
Calculating Your Retirement Costs
One rule you may have heard of is the 80% rule. This rule suggests that you should try to replace 80% of your pre retirement paycheck with portfolio withdrawals, Social Security, pensions and other sources of income. However, this rule has come under scrutiny in recent years because it may not give an accurate estimate. You may find yourself spending less or more than this depending on what lifestyle you desire to live in retirement.
In fact, most retirees spend more on travel, health care, utilities, and day-to-day activities like eating out or going to the movies. Depending on your situation, this may be enough to offset categories where most people spend less, which include transportation, clothing, and your mortgage. Factors to consider include…
- Travel plans – Do you have any dream vacations? If so, it’s wise to factor them into your retirement savings ahead of time.
- Mortgage – Will your home be paid off before you retire? Do you plan on downsizing or moving?
- Dependents – Are you currently footing the bill for education/living expenses for a dependent that will have left the nest by the time you retire?
- Healthcare Costs – Without insurance from your employer, you can expect the cost of insurance to go up. You may also encounter more health issues and require more regular health maintenance as you age.
- Retirement Age – Most people are eligible to collect full social security benefits at age 67, but some people want to retire sooner or later. The age at which you retire will impact how much you should save.
- Inflation – No one can predict exactly how the market will shift over time, but it’s important to consider that the cost of living will likely rise throughout your lifetime
As you can see, planning for retirement isn’t as easy as it may seem. Rather than relying on one rule of thumb, you should consider your income, spending habits, and how they may change as you age and enjoy more free time.
Doing the Math
It’s time to break out the calculator (or Excel spreadsheet, whichever you prefer) and do some math. First, you’ll need to figure out how much you’re spending currently. If you’ve been reading the rest of my blogs, you may already have this number from your budget. If not, you’ll need to take a look through your checking account and determine where your paycheck is going each month. It will help to look back 3-6 months and categorize to get an average. Categories should include groceries, entertainment, mortgage, utilities, and anything else you regularly spend money on. Your spreadsheet should look something like this:
This will help you understand how much you’re actually spending each month after taxes, 401k contributions, savings, and anything else that is removed from your paycheck before it gets to you. This number is the most accurate starting point for your post-retirement needs.
But, what about changes in spending? Plan ahead for any large expenses you know about in advance. This is where the travel plans, healthcare costs, and other factors we discussed above come into play. Remember, it’s always better to have more money than you need!
How Much Should You Be Saving?
Once you know how much money you need to save for retirement you’re done, right? Having a goal is great, but it’s equally important to have a plan to reach that goal. Nerdwallet offers a helpful retirement calculator that lets you plug in your age, salary and other information along with that monthly retirement spending number we just calculated. You can even adjust for predicted inflation. This is a very helpful tool that will help you understand how much you should be setting aside each month in order to plan for a happy retirement.
Time to Take Action
If you’re less than thrilled where you are currently compared to your goals, you’re not alone. What matters is that you’re ready to try and change your situation. Check out some of our material on managing your finances for a starting point on taking control of your monthly budget and increasing your retirement savings.
I’m looking forward to continuing this journey with you! Please feel free to contact me if you have any questions, and please FOLLOW US so you don’t miss out on upcoming blogs!