It’s not that there aren’t steps to be taken to achieve financial satisfaction in retirement, experts say. Disciplined middle-class people can identify these and execute them. A proper mindset, however, is required.
Let’s say you’re on the cusp of retirement. By then, you should have a pretty good idea of how much you and your spouse will need in your golden years, which on average lasts roughly 20 years among those who reach age 65 in relatively good health.
So what is the number? Is it $750,000, $1 million, $1.5 million, $2 million or even more? There is no good answer because the figure varies enormously. It depends, among other things, on how much income you earned in your working years, your lifestyle, and whether you have been a disciplined saver and investor over time. If you’re not but still managed to save modestly – say 5 percent to 10 percent a year – you may still have put enough away if you were a high-income earner.
And there is yet more uncertainty because some pundits — notwithstanding these variables and others — often say that savings of roughly $1 million is a good starting point for retirement. In fact, 44 percent of workers expect retirement will cost at least $1 million, according to a 2019 survey by Charles Schwab. But even this survey fails to say whether that $1 million is for one person or a couple, a substantial oversight.
All you can really do to come up with an estimate is to take into account that singles and couples will need roughly 70 percent to 80 percent of their pre-retirement income, then calculate how much you usually spend annually. Incorporate Social Security and a 401 (k) in your calculations. Then the use the figure you come up with as a starter, consider incorporating likely inflation over time, and hope for the best, bearing in mind that the figure may change over time. If you or your wife wind up with several surgeries and don’t have supplemental health insurance, for instance, you may have to trim your rate of spending. Ditto if your husband or wife may pick up expensive new hobbies in retirement.
The idea, nonetheless, is that retirees have fewer expenses. You no longer have to save for retirement, and you’ll probably spend less on commuting expenses and other work-related costs. Lots of non-health variables intervene with how your finances fare, however. For example, if you plan to travel frequently in retirement, you may want to aim for 90 percent to 100 percent of your pre-retirement income. Conversely, if you downsize your living situation, you may be able to live comfortably on less than 80 percent.
The wisest returnees take into account all of these variables and come up with a relatively accurate number of the amount needed in retirement. The next step, given this amount, is how much annual income they will have.
To do so, a retirement calculator is one option. Another is the “4 percent rule,” not without some flaws but a good starting point for determining a safe annual withdrawal amount. This rule says you can withdraw 4 percent of your retirement savings in your first year of retirement. So if, say, you have $1 million saved, you would take $40,000 out during your first retired year. In subsequent years, you would adjust this amount upward to keep up with cost-of-living increases.
Pundits say you shouldn’t have to worry about running out of money in retirement if you follow this rule. Specifically, the 4 percent rule is designed to make sure your money has a high probability of lasting for at least 30 years.
As for calculating your retirement savings target, there is no perfect method. Investment performance will vary over time, and, as already mentioned, it can be difficult to accurately project your income needs. There are additional considerations as well. For one thing, not all retirement plans generate the same amount of income. Money withdrawn from a traditional IRA or 401(k), for instance, is taxable income. On the other hand, money withdrawn from a Roth IRA or Roth 401 (k) is not taxable. These differences may change calculations somewhat.
It would be remiss not to point out that plenty of Americans are not in a financial position to build a respectable nest egg and then determine how long they can live in comfortable retirement. Some studies have shown that Americans are saving less than one-fourth of the amount they think they should be saving for retirement. And some have no savings at all.
Regardless of financial status, healthcare often turns out to be the biggest expense in retirement. That’s obvious among those short on money. But even some folks with respectable savings sidestep supplement insurance as an additive to Medicare, and even more pass on long-term care insurance because they don’t think they will need it. In some states, one month in a nursing home can cost as much as $9,000. According to a report by Health View Services, a healthy couple retiring at age 65 will pay about $270,000 for healthcare in retirement.
In some cases, those who fail to create a lifetime retirement plan do so not because of financial woes but rather the irksome uncertainty of longevity. This can make it very difficult to accurately plan retirement finances. The fact is that the only people who know how long they will live are the terminally ill. “What if you live 25 years post-retirement, instead of 20 years, and you also need extensive care in your last five years?” says one financial planner. “How do you plan for that?”
Assessing all these points, it should be clear that if you’re not near retirement, it’s a very good idea to consult a financial advisor about retirement finances. He or she can tailor a retirement savings goal to your particular situation and also set you on the right path with a savings and investment plan that can make sure you reach your goals. Retirement planning – an issue of huge importance despite myriad uncertainties – should include input from a professional.
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