People are living longer. As a result, for many people, retirement is lasting longer. The life expectancy of women is now 86 years, and the life expectancy for men is 84. For people who retire at 65, that means between 19 and 21 years of life postretirement. Plus, of course, many people retire earlier than 65, and many folks live past the average life expectancy. You may spend 25 to 40 years in retirement.
But what will you live on once retired? Social Security is not likely to cover all your living expenses. You’ll need proper retirement savings.
Why You Need a Forecast
It’s a good idea to forecast how much you will need to save for retirement. The main reason, of course, is that no one wants to be destitute in old age. In fact, no one wants to live on a shoe string budget, unable to afford vacations — or health insurance.
But an additional strong reason to forecast how much you will need is that there is no one size fits all. If you could call up a magical chart that would tell you how much is needed, that would be great. That’s why you often see headlines telling people they need to save $1 million for retirement. It’s scary and it focuses the mind on retirement and how much it costs.
But people’s situations vary too much for any single figure to cover everyone. Real estate, for example, is a huge variable. If you own a house and your locale has low property taxes, you may not need all that much for real estate costs in retirement. If you or a partner develop Alzheimer’s and need or want to move into a pricey assisted living facility, on the other hand, you may need major bucks for the fees, monthly amounts and specialized care.
Health care is also a huge variable. If you are healthy during retirement, your healthcare costs may be minimal. If you or a partner develop either major health concerns or one of the chronic diseases common among the elderly, you may face substantial yearly costs out of your pocket.
So. Whether you’re 20 or 66, or any other age, you need to forecast your retirement savings. Here’s three good ways to do that.
Develop a Budget
To forecast your savings, the most prudent first step is to project how much you will need. It’s the only way to ascertain whether how much you’ll need in savings.
In years past, the rule of thumb was that people should plan on expenses of 70 percent to 80 percent of their expenses before they retired. This assumption was based on the theory that, for most people, expenses slowed down in the golden years. No more commute to work costs, for example, or business suit wardrobes.
More recent thinking, though, points out that healthcare may be a major cost for the elderly, and it is not assured of staying at the same expense level. In fact, premiums and prescription drug costs, especially, have been rising steeply. Many observers thus think that planning to spend the same amount you currently do is wiser.
But, of course, in developing your budget you need to take your own situation into account. Assess what your family’s health was in the golden years. Many people mirror their family’s health. What are your real estate plans? Live with grown children? Retire to a cheaper area? What do you want to do with your time? Volunteer? Garden? Travel to exotic locales? Variable costs, as we say.
A word about inflation. Be sure to add three to four percent for inflation every year. Food, clothes and so on all go up.
Figure Out the Income You Can Count On
Next, it’s time to figure out what income will be coming in during retirement. Social Security is a bedrock for many people, even if they can’t entirely pay the bills on it. Look up the current estimate for your retirement income with Social Security. This will fluctuate depending on any changes in your income, of course, but it’s a good idea to have a handle on the estimate. Keep tabs on it each year.
Then, tote up any other funds you know you’ll receive for sure. Do you have a pension? How much are the estimated benefits? Rental income that should keep on keeping on in retirement?
Then, subtract your projected expenses from your projected income. If there’s a shortfall, that’s how much you need to have in savings.
Estimate How Much You Need to Save
If you don’t have nearly enough saved, don’t panic. It is time, though, to start saving the maximum for retirement if you can. If you have a 401k plan via your employer, put all you can in it. That’s doubly true if they will match the amount.
As a rule of thumb, the U.S. stock market has advanced, on average, 8 percent annually over the last several decades. If your retirement funds are invested in the stock market, figure out how much they will increase. If you are 45, for example, the 8 percent average will give you over $500,000 for retirement in 20 years. That requires, though, saving $925 per month.
Remember, too, that no one draws out all their retirement savings the minute they say farewell to their workplace. Withdrawals of a certain percentage of the total usually are done every year. So your savings can continue to grow in retirement.
The best way to forecast your retirement savings is to develop a hypothetical retirement budget, taking your needs and wants into account. Then, figure out how much you will have coming in. After that, estimate how much you need to save.