Many people understand how important saving for retirement is, but they often don’t know how much they should be saving. With increasing age expectancies and decreasing resources for retirees to outlive their savings in this troubled economy, one of the central concerns for any working American in their sixties is outliving their savings for a lengthy retirement of 30 years or more.
Even with the vast amount of information available about saving for retirement, it can be complicated to know what to save for yourself and your family’s needs, since it depends on unpredictable circumstances and events. A financial advisor should look at your lifestyle, financial goals, and other specific information to customize solutions for you.
However, one rule of thumb you can follow is to try to save 80% or more annually of what you currently make in your pre-retirement salary to maintain your current lifestyle in retirement. Here are some other factors to consider when trying to piece together your retirement savings goals:
Expected Age of Retirement
The first step is to determine an expected retirement age. It’s important to be realistic and factor in potential circumstances like illness or other health issues, as well as employment changes, in determining this age. It’s important to have a plan that could still allow you to live comfortably if you are forced into early retirement.
Health and Life Expectancy
While you can’t predict unforeseeable events that could affect life expectancy, you can try to estimate your life expectancy given factors like family—how long your parents or siblings lived and what diseases are predominant in your family’s health history—as well as your personal health history, chronic issues, lifestyle choices that could be affecting health, and so forth. Also consider the fact that medical advancements may help you address these issues and live to the age of 100! Of this life expectancy, try to calculate how many years you will spend in retirement.
Along these lines, try to determine what kind of health issues you may need to address and the cost of health care to take care of them. The costs of health care have increased and employers are offering fewer to their retirees.
Think about what kind of lifestyle you’d like to have. Would you like to travel? Are there any philanthropies you’d like to support? Would you like to join any expensive societies or organizations that may require hefty membership dues? Are there hobbies you may want to develop? Hobbies can even be a source of income for retirees if planned properly! Answering these questions will help determine what your ideal retirement will potentially cost.
Many people overlook this crucial factor when it comes to investments. Inflation can decrease the value of your savings, decrease your purchasing power, and significantly impact your investments and the success of your financial portfolio.
Social Security Benefits or Lack Thereof
Many retirees think they can count on Social Security benefits to sustain their retirement. But this may not be true for your specific situation. With increased life expectancies and fewer generations working to take care of them, benefits may be scarce to none. According to recent statistics, Social Security comprises less than 50% of retirement income, leaving a lot of income to be fulfilled in other ways.
The Grand Total
This is just an initial set of considerations to make when it comes to calculating retirement income needs to plan savings. The total may appear intimidating but after factoring in how much income will be available to through potential retirement accounts, investments, or pensions, and the money you’ve saved, you may only need to save a minimum amount each year to achieve your retirement income goals. If income does not match expenses, you will need to rely on savings to bridge the gap.
The costliest mistake is not planning ahead. Less than half of Americans have tried to calculate how much they will need to save for retirement, a finding published in the 2019 Employee Benefit Research Institute study. Start soon and you will be one step closer to realizing your retirement goals.