By When planning for retirement, it often feels like you’re trying to solve a puzzle with missing pieces. The lead-up to this milestone can be overwhelming, and questions likely will arise at every stage, including how much money you need to retire. However, the answer isn’t a one-size-fits-all solution; your nest egg will depend on your lifestyle, goals and expenses. But whether you want to travel the world, start a new hobby, spend more time with family and friends or ramp up your spending in retirement, it’s important to have a general idea of your retirement number. Here, Woman’s World turned to financial experts to break down everything you need to know about retirement income and expenses.
How much money do you need to retire?
While experts agree that selecting the appropriate retirement strategy should be individualized, it is important to at least estimate a number that will help you thrive during this time, especially now that the retirement age has gone up to 67.
It is a good idea to consider your specific savings goals. You will likely need to account for healthcare and housing costs at a minimum, explains Michelle Mieras, JD, LLM, CTFA, CDFA, senior wealth strategist at BMO Wealth Management, who notes that hobbies and travel are also things that you may allocate money toward. If you want a more accurate number, try this retirement calculator from NerdWallet, where you can enter age, income, monthly contributions and more.
Mieras adds that you should have the equivalent of one year’s salary saved by age 30, three times your salary saved by age 40 and six times your salary saved by age 50 to eventually have eight times your annual salary saved by the time you turn 60. For example, “If you’re in your 20s and making $50,000 a year, you should have $400,000 in retirement savings by the time you reach your 60s and start approaching the traditional retirement age of 65 or 67.”
How to save for retirement
But how can you effectively be prepared for this stage? “The general rule of thumb is that retirees will need to replace 70-80 percent of their pre-retirement income,” says Jacqueline Reeves, MFS, AIFA, PPC, director of retirement plan services at Bryn Mawr Trust, a WSFS Company. She adds that income typically comes from a combination of Social Security benefits, pensions and personal savings like 401(k)s, a Roth IRA or other retirement accounts.
Use the four percent rule
As you approach retirement, Chelsie Moore, CFP, CFA, director of wealth management solutions at COUNTRY Financial in Bloomington, IL, recommends calculating how some expenses, like retirement savings and work-related costs, will decrease while others, like healthcare, might increase.
Once you know how much you want to spend (and what kind of lifestyle you want), you can determine how much you need to save. “A common guideline is the four percent rule, which suggests you can indefinitely withdraw four percent of your investment portfolio each year,” says Moore. “To estimate your savings goal, divide your expected annual spending by four percent. For example, if your current annual income is $125,000, 80 percent of that is $100,000. Dividing $100,000 by four percent gives you a target portfolio of $2.5 million.
Try the four-box method
Another helpful strategy to try is the ‘four-box method.’ Moore says this approach helps retirees manage their finances by organizing expenses and matching them with the right income sources.
“This method covers essential expenses like housing, utilities, groceries, and healthcare with guaranteed income sources such as Social Security, pensions or annuities,” says Moore. “Then, it funds discretionary expenses like hobbies, travel and dining out with more variable income sources like investment dividends, interest or even part-time work.”
Factors to consider when financial planning for retirement
Since retirement is a time of change, Reeves says there are certain expenses to consider, which include:
- Healthcare costs often increase with age, including premiums, co-pays, and long-term care. Keep in mind that even with robust health insurance, you will likely face out-of-pocket costs.
- Housing costs: Whether you plan to downsize, relocate or stay in your current home, you’ll still have those expenses.
- Travel and leisure: Reeves says to make a budget for hobbies, vacations and entertainment.
- Inflation: The cost of goods and services rises, increasing expenses, which you’ll need to ensure you’re ready for.
- Taxes: Consider how your retirement income will be taxed, especially withdrawals from tax-deferred accounts.
- Day-to-day cost of living: Reeves notes that you’ll also need to budget for regular, daily costs such as meals, household supplies, etc.
“Review your retirement plan at least once a year or after major life changes such as marriage, childbirth, job changes or market shifts,” says Reeves. She suggests working with a certified financial planner (CFP) to reassess your goals and adjust accordingly.
Common mistakes people make regarding retirement
One of the most common retirement mistakes is waiting to start or putting off retirement savings for other financial priorities. “The sooner you start investing in retirement, the more money can grow over time,” says Mieras. Waiting until later in life to prioritize retirement shortens that window.
Another thing to avoid is withdrawing money before retirement. Reeves says this will cost you money, especially with tax-advantaged or penalized accounts. She also suggests diversifying your investments.
