Retirement Planning is an important step in ensuring you have enough money to live the life of your dreams once you retire. It’s important to consider all your expenses, both those that will continue in retirement and those that may not.
Other factors to consider include Social Security benefits, inflation, and healthcare costs.
When it comes to retirement, every person’s goals are unique. It’s important to consider what lifestyle you want in retirement so that you can figure out how much money you’ll need. You may also want to set budgeting and savings goals for yourself. These goals should be SMART – specific, measurable, attainable, relevant and time bound.
Whether you want to travel, spend more time with grandchildren or restore a vintage automobile, these activities will cost money in retirement, and they should be included in your budget. Other expenses that will likely rise in retirement include food, transportation and healthcare costs. Depending on how active you want to be in retirement, these expenses can increase by 55% to 80% of your current income.
Housing expenses are typically the highest expense for people in retirement, according to a Bureau of Labor Statistics report. Ideally, you should have your mortgage paid off before retiring, and downsizing into a smaller home can help you save on property taxes and utilities.
Transportation expenses are the second-highest retirement expense, and they can quickly add up. On average, Americans over the age of 65 spent $8,172 on transportation costs in 2022. This includes the purchase of new vehicles and regular maintenance, as well as gas and insurance.
Health care expenses are another big factor in retirement, and they can often increase by up to 20% during the latter years of life. Medicare doesn’t cover all medical expenses, so it’s important to have supplemental insurance in place for these costs.
In general, most financial planners estimate that you’ll need 80% of your pre-retirement income to live comfortably in retirement. This rule of thumb is not always accurate because spending in retirement can vary widely between individuals, and it is usually higher in the first few years of retirement.
Fortunately, there are ways to get close to your retirement savings goal, including working longer, saving more now, and investing in assets that offer growth potential. You can also try using a retirement calculator to create an estimated budget based on your current income, projected retirement date and desired lifestyle in retirement.
What are your goals in retirement?
Whether you write them down on paper or use an app to track your progress, retirement goals give you a clear roadmap and motivation for realizing your vision of the future. Identifying your goals will also help you figure out what needs to be done now to get there sooner rather than later.
Your retirement goals may vary, but they should take into account your current financial situation and savings habits, as well as the kind of lifestyle you envision in retirement. For instance, if you’re in debt, you might need to save more to make up the difference between your projected spending in retirement and what you’ll be able to afford on a fixed income.
A common rule of thumb is that you should aim to replace about 70% to 90% of your pre-retirement income in retirement. This is typically a combination of savings, investments in an account like a 401(k), and Social Security benefits. However, a mortgage and other long-term liabilities can factor into this equation as well.
In addition to saving, your goals might include personal growth opportunities in retirement. Perhaps you want to continue your education or pursue a lifelong dream of writing. Or maybe you plan to volunteer or work on projects you’re passionate about. It might be important to think about how these activities will add a sense of purpose and meaning to your retirement.
You’ll also want to consider what kinds of lifestyle amenities you hope to enjoy in retirement, such as vacations or travel. In this case, you might have to decide if you can cut back on other expenses or relocate to a place with a lower cost of living to help fund your plans.
Keeping your goals in mind can make it easier to set savings and investment strategies that can support you over time. For example, you might choose to maximize your 401(k) contributions or explore options like a Roth IRA if you’re not eligible for a workplace plan. These types of accounts allow you to invest with pretax dollars, and the money in them grows tax-free.
What if something unexpected happens?
Even with diligent saving and investing, you may still face unexpected financial challenges. A health condition could prevent you from working, or your home could be damaged by a natural disaster. Life is unpredictable, but having sufficient insurance coverage can help alleviate some of the stress and uncertainty. Consider life, disability income, and long-term care insurance to help you manage expenses should the need arise.
You may also want to explore alternative savings vehicles to supplement your retirement accounts, such as health savings accounts (HSAs), annuities, and other innovative strategies. Be sure to seek the guidance of a financial professional who can tailor a strategy that meets your specific goals and circumstances.
Some retirees find themselves dipping into their retirement accounts to pay for unexpected expenses or to indulge in unnecessary purchases. This can have serious consequences, as you’ll likely incur penalties and tax bills that may reduce the overall value of your retirement savings.
It’s also important to consider what you hope to accomplish in your later years in retirement, especially if you don’t have children. This could include volunteering, traveling, or pursuing new hobbies and passions. Clearly defining your aspirations can help keep you motivated and grounded during challenging times, especially in retirement.
One last thing to consider is your healthcare needs in retirement. While many people are able to rely on Medicare, there are others who find it necessary to secure long-term care insurance. This can help you cover the costs of nursing homes and home care if needed, without consuming all of your savings.
Taking the time to address these questions now will help you feel confident in your ability to meet your retirement goals. By establishing good money habits early on and seeking expert advice throughout the journey, you can feel prepared for whatever comes your way.
How will you pay for these goals?
As you consider what you want to do in retirement, it’s important to also consider how much those things will cost. For example, health care costs are likely to increase significantly in retirement, and they can easily eat up a lifetime of savings if not carefully planned for. According to 2023 estimates from Fidelity, a couple retiring in their mid-60s could expect to need $315,000 to pay for health care expenses during their golden years. And that’s just for basic medical coverage. It doesn’t even touch on the stratospheric cost of extended health care in a nursing home.
Some financial experts suggest you should aim to replace 80% or 90% of your preretirement income in retirement through savings and Social Security benefits. This approach is often based on a formula that uses your expected annual salary in retirement, inflation rates, and the performance of your investment portfolio. But those numbers are a rough guide and should be adjusted for your specific circumstances.
It’s best to start saving as early as possible so you can take advantage of the power of compound interest. You should also maximize your contributions to any workplace-sponsored retirement plans. If your company offers a match on your contributions, that’s free money that you shouldn’t miss out on. And remember that your retirement savings rate should increase with every pay raise you receive.
Another way to save is by investing in low-risk investments like short-term Treasuries, which offer relatively stable returns over time. However, these investments typically have lower yields than other investments. It’s also important to diversify your assets. Many financial planners recommend a mix of stocks, bonds and cash or short-term Treasuries, such as T-bills.
The bottom line is that you should perform retirement calculations periodically to see if your saving goals are on track. It’s a good idea to do them at least once a year, but more frequently is better. This will help you determine if you need to save more or find creative ways to boost your savings.
Remember that life is unpredictable, so it’s important to keep your plan flexible and adjust it as needed. For instance, if you’re saddled with debt or have unexpected expenses (like a leaky roof or broken leg while snowboarding), that may make it necessary to scale back on some of your retirement goals for the time being.