“How much money will I need for retirement?” That’s a loaded question that I often get from my clients. If you’re like most people, you’ve been wondering about it too.
Unfortunately, not many people have taken the time to actually figure out how much they need for a comfortable retirement. According to a recent report, only 41 percent of American workers have done so.
The truth is, most of them are only guessing about the nest egg they’ll need instead of crunching real numbers. About 37 percent think they’ll need at least $1 million. But how much do they have saved? Well, only 20 percent have $250,000 or more, while 47 percent have less than $25,000 stashed.
Not spending the important time and thought to project your retirement needs is like rolling dice with you and your family’s future. But your future is not something to gamble on; it’s something to plan. So how do you start?
By counting the cost.
Here are five questions to ask yourself when figuring out your retirement needs.
What kind of retirement do I want?
When thinking of retirement, the first question most people ask is, how much can I spend in retirement? But that’s the wrong way to approach it. Sure, you’ll have to figure out the spending aspect of it. But as a financial life guide, the first question I ask clients is, what kind of retirement do you want?
Retirement is not just about how much you can spend, but about how you want to spend the rest of your life. Most people will have 20-30 years left to live after retirement. That’s why we have clients think of their ideal life in retirement.
We apply the FORM concept to retirement planning, exploring your ideal life regarding your family, occupation, recreation, and motivation. What activities does your family engage in currently that you want to continue? Where is most of your family located? Do you want to move closer to your grandkids? These are important questions concerning retirement.
Then consider your occupational and recreational desires. Many retirees are pretty active these days. They volunteer, they still work, and they pursue passions they weren’t able to when they had to clock in every day for work. I have a client who retired a few years ago and he still works as an engineering consultant because he loves his work. He doesn’t need the money, but he loves being an engineer and can work when he wants. He still has something to add, but now he has the flexibility (and the financial independence) to have more control over his work schedule.
Before you think about money, think about the life you want.
How long will I be retired?
Retirement isn’t indefinite. It has an end. We don’t like to think about death, but when planning for retirement, we have to consider how long we expect it to last.
While you don’t know how long you’ll live, you can estimate your life expectancy by assessing a few things: How’s your health? What’s your family longevity history? Is there a history of disease in your family?
It’s a morbid assessment, but it’s necessary.
Regardless of family history, you should consider other factors as well. I have some clients who half-jokingly say no one in their family lived past 75 so they don’t expect to either. But with medical advancements, life expectancy is at an all-time high, and the 85-and-over population is expected to increase by 351 percent through 2050.
So you might not be checking out of here as early as you think. With a longevity estimation, you know about how long you’ll need your money to last. (You can use this online tool to help estimate your longevity. I got 101!)
How much will I spend?
Once you consider the kind of retirement you want and how long you expect it to last, you can start examining your spending and income. The best way to project this is by looking at what you’re spending now.
Take a look at your fixed cost (mortgage, housing, cable, utilities, etc.) and variable cost (food, travel, entertainment, shopping, etc.) to understand your monthly spending and gauge how much you’ll spend in retirement. Let’s say this adds up to $10,000 a month.
Next, examine your expected retirement income. Let’s say you retire at 65 and you’ll have income from social security and a company pension that total $4,000 a month. That leaves a $6,000 monthly gap between what you want to spend and your income (an annual shortfall of $72,000).
You should look at your retirement savings and consider if you have enough to meet that $72,000 yearly shortfall for the rest of your life. The truth is, most people don’t consider these recurring shortfalls and just wing it. And it is probably no coincidence that most people don’t have the necessary amount to meet their retirement aspirations in savings.
How will inflation, healthcare cost, and taxes impact my retirement?
Of course, that $72,000 you think you need now will be slightly more in 15 years, thanks to inflation, rising healthcare cost, and taxes.
Think about it. Is the cost of milk or gas the same as it was 15-20 years ago? Nope. And it won’t be the same in the future because of natural inflation in the price of goods and services.
And don’t forget healthcare costs. The top concern I hear from clients during retirement planning is the rising cost of healthcare. In fact, the average couple can expect to incur about $260,000 in healthcare costs in retirement.
Think Uncle Sam is off your back because you quit your 9-to-5? Think again! Taxes are a major part of retirement planning. Your social security income, pension income as well as the money you withdraw from your 401K and IRA are all taxable in retirement.
So that $72,000 shortfall today may be more like $80,000 when you consider all these factors.
Do I need to adapt my lifestyle, and how? How can I adapt my lifestyle?
Once you grasp just how much retirement may cost, and you’re not sure how you can meet the need, you may have to consider adapting your retirement lifestyle.
Consider what things are non-negotiable and what things can be cut or adapted. Maybe you don’t need as large of a travel or entertainment budget.
But adapting your lifestyle isn’t just about thinking of what you can give up. It’s also about getting creative with how you can use your passion to make up an income gap.
For example, a lot of people love playing golf and look forward to doing it every day in retirement. If that’s something you want to do, why not work at a golf course during retirement? You get to be around golf every day, and get paid to be there! (You can probably get discounted green fees, which can subsidize your recreation budget as well.)
Now get a guide to help you put it all together
There’s a lot to consider when counting the cost of retirement, and it can be overwhelming for individuals. That’s where a financial life guide can help you navigate the journey. We don’t dictate what you can spend, we just help you realize your retirement goals, figure out how much they’ll cost, and get you on a path to reach your destination.
Only 41 percent of people have considered how much they need in retirement, and many of them aren’t counting the cost properly. Considering these five questions will help you understand your retirement needs and serve as a basis for developing a plan.