There’s no one-size-fits-all approach to retirement planning. Each situation is unique. As you work to create your retirement plan, here are 5 factors that need to be considered before deciding how much money you’ll need in retirement.
Retirement isn’t an age. It’s a financial number. Once you know exactly how much you’ll need to live out your retirement dream, you can work to accomplish that goal and retire once you’ve reached it. It’s up to you to make it happen. If you’re going to retire with plenty of savings and live the life you’ve always dreamed about, you need to create a plan now. Let’s talk about the most important factors to keep in mind as you find your retirement number.
1. Inflation
Inflation is the gradual rise of the general cost of living over time. It hovers around 3% every year. Now, this might not be a huge deal after a couple of years, but if you’re planning to live 20 or 30 years in retirement, you need to take inflation into account! If you spend $3,000 on your monthly budget in 2020, you would need over $7,000 by the year 2050 to have the same purchasing power!
2. Cost Of Living
Cost of living is about where you want to spend your dream retirement. You’ll need a lot more money if you’re going to retire in Manhattan vs. Little Rock. Most of the time, retirees want to move closer to family, or just be somewhere that’s more affordable. Here are the top costs you’ll need to consider when making your monthly budget:
- Giving
- Housing
- Transportation
- Food
- Taxes
- Health care
And speaking of health care…
3. Health Care Expenses
Some expenses will go down—like your mortgage—but you still need to create a retirement budget so you know exactly how much income you’ll need every month. Here’s the main big-ticket item to plan for in retirement: health care costs. According to Fidelity, a couple retiring today will need about $285,000 to cover their health care expenses during retirement. If you spread that out over 25 years of retirement, that comes to $11,400 a year! Here are a few ways you can prepare for high health care costs:
- Apply for Medicare
- Save up a large medical “emergency fund”
- Open an HSA to start a tax-advantaged health care savings plan
4. Social Security
You can calculate your Social Security benefits and include that number in your budget. Social Security benefits are like the icing on the cake, not the cake itself. Social Security benefits are available starting at age 62, but the longer you wait to claim them, the more you’ll get. You'll want to wait as long as you can so you can receive the full benefit. In the meantime, though, work to ensure you’ve got enough saved through your other retirement investments to take care of yourself. Should you wait on Uncle Sam to swoop in and save the day? Nope! Grab your own cape.
You can calculate your Social Security benefits and include that number in your budget. Social Security benefits are like the icing on the cake, not the cake itself. Social Security benefits are available starting at age 62, but the longer you wait to claim them, the more you’ll get. You'll want to wait as long as you can so you can receive the full benefit. In the meantime, though, work to ensure you’ve got enough saved through your other retirement investments to take care of yourself. Should you wait on Uncle Sam to swoop in and save the day? Nope! Grab your own cape.
5. Your Lifestyle
Spend some time dreaming what your lifestyle will be like in retirement, then calculate how those choices will impact your nest egg number. If you want a simple, stay-at-home lifestyle, go for it. If you want to frequent Caribbean cruises and five-star restaurants, then you’re going to adjust how you save for retirement.
Here are a few questions that will help you start dreaming:
Spend some time dreaming what your lifestyle will be like in retirement, then calculate how those choices will impact your nest egg number. If you want a simple, stay-at-home lifestyle, go for it. If you want to frequent Caribbean cruises and five-star restaurants, then you’re going to adjust how you save for retirement.
Here are a few questions that will help you start dreaming:
- How much do I plan to spend on travel every year?
- How much will I spend on family (kids and grandkids)?
- Will I help pay for my grandkids’ college?
- How much do I plan to spend on entertainment?
- Will I donate time and money to churches or nonprofits that I care about?
If you’re married, this is a good conversation to have with your spouse. Get on the same page about your retirement dreams so you both know where you’re headed! Everyone’s nest egg is different because everyone’s dreams are different. This isn’t about keeping up with the Joneses—it’s about getting a crystal-clear picture of what your later years will look like.