How Much Do I Need to Save for Retirement?
If you are starting your retirement planning, the first part of deciding how your investment and savings plan should go is deciding how much you will need to be comfortable. There’s a rule of thumb that says you can plan on needing 80 percent of your former salary, and it is the number that many pension funds used to use when that method of retirement planning was more common. The truth is, though, that your lifestyle and your retirement era goals are going to play a much bigger role in determining that number than most people expect. The best way to make the calculation is to sit down and figure out how a variety of factors are going to affect your retirement lifestyle.
Each of the following factors will need to be considered in its own right:
- Retirement Age: How long do you intend to work? The longer you contribute to your retirement funds, the later you can afford to start and the fewer years you generally need to plan for.
- Life Expectancy: If you have no major health issues, you might be able to count on using the estimate for average life expectancy for the year you were born. Otherwise, you may need to adjust according to your lifestyle and medical diagnoses.
- Future Healthcare Needs: This is an area that no one can predict, but if you have already developed health conditions that need to be treated regularly to keep you healthy, then you can estimate the cost of care for them into the future. You can also estimate, based on current out-of-pocket health care expenditure limits, what your maximum out-of-pocket expenses will be before you trigger catastrophic coverage. Don’t forget to add the cost of premiums for Medicare and your Medigap policies.
- Lifestyle: Some people plan to spend retirement traveling. For others, it is a chance to open a new business or to pursue hobbies. All of these lifestyle features require money, as will your living expenses. Taking stock of the cost of living in the community you will retire in is key to understanding what you will need, as is adding in the cost of any additional activities you want to be sure you can participate in.
- Inflation: This is a cost that needs to be calculated in any savings plan, and one of the key reasons why it is important to make sure you have the kind of return that lets your money truly grow. Some investments only keep up with inflation. The longer you live, the more likely this is to play a major role in your saving for retirement.
- Social Security: The retirement income from Social Security benefits is not always generous, but it does provide a backbone that you can build the rest of your retirement plans around, as well as a final resource you can rely on. It also reduces the amount of income you will need from investments, so make sure to deduct it from your other totals.
Let’s just say that you are staying in your home and you have the property paid off, so you only need to worry about property taxes, utilities, and living expenses. You decide that means you can get by on 70 percent of your old earnings. If you were originally making $50,000 that means you will need $35,000 per year.
If you look at Social Security, it looks like you can plan on about $24,000 per year in Social Security income on average, if you do not retire early. That’s a healthy percentage of the amount you decided you needed at a minimum, but you will still have a hefty shortfall each year if you do not make extra investments.
Now, if you decide to retire at age 70 to get your full Social Security, you will need to plan your life expectancy and investment savings to match that gap so that your savings can provide you with the additional $11,000 per year for as long as necessary.
Once you have that number, you can begin to save by breaking down the number of years you have to retirement and figuring out what kind of contribution you need to make to get to retirement with the right funds. Usually, straight savings will not be enough, which is why you will also need to work with an investment company that can advise you about the best ways to grow your money. That way, you can be sure you will be ready to reach your goals.
If you are looking for help with your retirement, you need advice that takes your unique situation into account. You also need to understand that there are no guarantees, and that you need to over-save and over-invest if you are going to be truly successful. Once you have worked out those basic principles, it’s a lot easier to decide exactly how much to put away each year.