How Much to Retire
Thirtysomething? Fortysomething? These are your most active retirement savings years. Now is the time for you to take advantage of every strategy to maximize your retirement savings.
Did you get a raise? Use some of that money to increase your contributions to your employer's plan. Did you receive an inheritance? Use some of that money to fund your retirement.
This is a good point in your life to start working out a retirement strategy: when you want to retire, what you plan to do, and how much money you will need to get to-and through-retirement.
How Much Will You Need?
How much money you’ll need for your retirement depends on many factors, such as:
- When You Want to Retire - You'll want your retirement income to last as long as you do, and you could very well live to be 80, 85, or even 90. Of course, the earlier you plan to retire, the faster you must save. You'll not only need you're money sooner, but it will need to last longer, too.
- Living/Lifestyle Expenses - Where you live, whether you own or rent your home, and your level of debt are just a few of the many factors that affect living expenses.
- Inflation - Interest rates and inflation were relatively low from 1996 - 2011. But don't let this make you overlook inflation-it can be dangerous to your future financial health. Even "low" rates of inflation can affect your buying power over time. Consider this: you needed $126 in 2010 to buy what $100 got you in 2000.1
- Healthcare Costs - Healthcare costs could have a significant impact on your finances, especially if you're on a fixed income and/or have to pay the full cost of your health coverage. Recent studies estimate that to cover out-of-pocket healthcare costs during retirement, a 65-year-old couple retiring in 2010 will need between $158,000 and $271,000. By 2020, those costs jump to between $265,000 and $454,000.2
- Legacy Plans - Many of us want to leave a financial legacy to family members and/or others who are important to us. You'll need to factor this into your retirement plan, too.
The Ups and Downs of Retirement Expenses
Only you know what you'll be spending money on during your retirement. But numerous studies have revealed some patterns that might be useful for your planning.
For example, recreation and travel expenses are usually higher during your first few years of retirement than in your later years. However, medical expenses can be very large in your later years. In fact, underestimating your expenses in your later years is a common mistake.
Use our monthly cash flow worksheet to estimate your expenses (your financial professional can also help).
| Ups and Downs of Retirement Expenses | |||
| Expense | Early in Retirement | Later in Retirement | Comments |
| Basic cost of living |  | | Inflation will likely cause basic living expenses to continually increase. |
| Business related expenses |  | – | These expenses are largely eliminated. |
| Clothing & cleaning costs | | – | Business & formal clothing, dry cleaning costs reduced. |
| Contributions to IRAs, savings plans, etc. | | – | You will probably not be making salary-deferred contributions to savings plans, but may add to IRAs and personal savings. |
| Health insurance | |  | Health insurance costs rise (significantly if coverage isn’t provided through an employer) until Medicare eligibility. You will still need insurance with Medicare, but it will probably be less costly. |
| Health care & medications |  | | Expect increasing dependence on health care facilities and prescription medication. |
| Mortgage | | - | Mortgages likely to be paid off early in retirement. |
| Recreation | | | Recreation expenses increase at first, but decrease later in retirement. |
| Taxes - income | | - | Generally (but not always) taxable income decreases. |
| Taxes - real estate, sales | | | Real estate and sales taxes will probably keep going up unless you move to a less expensive area. |
| Transportation, parking, commutation | | | The need to use automobiles extensively is reduced. |
| Travel | | | |
