By Bryan Lee, CFP®, MBA
One of the first steps to retirement planning is figuring out how much money you need to retire. Many experts suggest saving enough to have an income equal to about 80% of your pre-retirement income, but this can vary wildly. (1) If your ideal retirement means staying in the home you already paid off and spending your time volunteering, it will be less expensive than someone who wants to spend their golden years traveling to exotic (and therefore expensive) places. If you are single with no dependents, your calculations will be different from someone who wants to pay for their grandchildren’s college expenses.
There are many factors to consider when calculating how much you need to retire, but answering these 8 questions will give you a better idea of the expenses in retirement you need to account for.
What’s Your Ideal Retirement Date?
Your age (now and in retirement) is one of the most significant factors to consider when determining how much money you need to save. If you want to retire early, you’ll have fewer years to save for a longer retirement. And if you start claiming Social Security benefits before full retirement age, you’ll also have to factor in a smaller monthly benefit amount.
The state of the stock market can also play a role in how much money you need and how long your money lasts. A Vanguard study found that you have a 31% higher chance of running out of money if you retire near or during a bear market if no course corrections are made to your spending. (2) Of course, you have no way of knowing if we’ll be in a bear or bull market when you retire—but this is a scenario you must account for in your retirement planning.
What Do You Want Your Retirement Life to Look Like?
Have you thought about the type of lifestyle you want to have in retirement? If you know you want to travel, play golf, or spend time with your grandkids, you need to factor in what that looks like and how much it will cost.
For example, if you plan to travel, you’ll need to consider:
- Will you be traveling stateside or internationally?
- How often do you want to travel?
- How would you like to get there? (e.g., car, plane, or RV)
- Where would you like to stay? (e.g., 5-star hotel, Airbnb, with family members)
- Will you be traveling with your family? Would you like to cover their expenses too?
- Will you cover costs for your kids/grandkids to come visit you, if they live far away?
- Will you maintain your primary residence? If so, who will watch your house and maintain it while you’re gone?
Even if your dream is simply to spend time with your grandkids, you’ll still need to think through your expectations and expenses. To some people, “spending time with grandkids” means babysitting a few times a week. To others, it means footing the bill for all-expenses-paid trips to various destinations of their choosing. Whatever it is you want to do with your time, map out the details so you can have a clear picture of how much you’ll need to make it a reality.
Will You Earn an Income in Retirement?
Working during your retirement is a great way to stay active, keep your mind sharp, and maintain a sense of purpose. Some retirees choose to build a second career through consulting. Others decide to pick up a low-stress, part-time job at a family-owned business such as an office or retail store. No matter what you do, if you plan to work during retirement, you won’t have to save as much now to live comfortably (assuming your health holds up and you are able to work).
How Much Debt Do You Carry?
Bringing debt into retirement has two major drawbacks:
- It reduces the amount of cash flow you have for housing, travel, hobbies, and other non-essential purchases.
- It can potentially drain your retirement savings quicker, which means you may run out of money or have to adjust your lifestyle down the road.
If you carry debt, take a close look at what you owe and figure out how much cash flow you’ll need in retirement to cover these expenses. Some people prefer to pay off any high-interest consumer debt before they retire. Others will take it one step further by paying down their mortgage and auto loans to lower their monthly fixed costs.
It’s important to consider the interest rate of each loan before making the irrevocable decision to pay it off. For example, paying off a mortgage that is locked at 2.75% when your investments may earn an expected long-term average annual return higher than that may not be the right financial decision (although paying it off may bring some peace of mind), whereas eliminating credit card debt at 22% is most certainly a wise decision.
What Kind of Healthcare Coverage Do You Expect to Have?
Right now, you most likely have health insurance through your employer. When you stop working, you’ll need to have a plan for healthcare coverage another way. You may be able to hop on your partner’s plan if he or she is still working. Or you can get coverage through the healthcare marketplace. Medicare eligibility currently begins at age 65, but even then, you may want additional coverage to pay for prescription drugs, dental care, eye exams, and other expenses.
Retirees sometimes fail to fully plan for expenses during the later stages of retirement, and medical care often tops the list. It’s estimated that retirees will use 15% of their income for health expenses, and the average retired couple could see cumulative healthcare expenses of approximately $300,000 after age 65. (3) Having funds set aside (and invested) in an HSA can help reduce the impact of those costs. Don’t let this be a planning oversight that prevents you from retiring comfortably!
Will You Have Any Dependents?
Your kids may be grown and out of the house by the time you retire, but that doesn’t necessarily mean you’ll stop supporting them financially. Over 79% of parents said they still give financial support to their adult children (ages 18 to 34), according to a Merrill Lynch study. (4)
And even if you aren’t helping your kids out with daily expenses, you may want to contribute to their weddings or down payments on home purchases down the road.
Where Will You Live?
Housing may be your biggest expense in retirement. And even if your home is paid off, you might want to consider downsizing to a smaller place that requires less maintenance and has cheaper utility costs.
To save even more, you can think about relocating to an area that has an overall lower cost of living. For example, the cost of living in Parker, TX, is 39.6% higher than the national U.S. average. (5) But move just about 15 minutes west to Plano and the cost of living drops to just 9.3% above the U.S. average. (6)
What Is Your Family’s Health History?
The average 65-year-old man has a 35% chance of living until age 90; that rate goes up to 46% for a woman the same age. (7) And while life expectancy is unpredictable, if your family has a strong history of living to age 90 and beyond, or depending on medical advancements, your chances may be even greater than these odds. In this case, you’ll need to determine if your planned retirement savings will last long enough, which is why we generally plan for clients to live until at least age 100.
Similarly, if you have known health conditions and/or a family history of health problems that could affect your life span or your ability to care for yourself or your spouse in your later years, you’ll want to consider this too.
Your Unique Retirement Needs a Unique Plan
It would be nice (and much less complex) if the amount needed for your ideal retirement came down to a simple formula or percentage. On the contrary, to apply to your unique situation, your magic number requires a deep dive into your financial situation, family history, and goals.
We at Strategic Financial Planning strive to simplify financial management while prioritizing understanding your unique needs, including how much you need to save for your ideal retirement. Beyond that, we also equip you with everything you need to be confident in your financial decisions. By delegating to us, knowing that we will steward your money with care and integrity, we take the burden off your shoulders so you can live without financial worry within a personalized retirement plan.
If you’d like to partner with a financial planner who can help you find the right balance between living the life you want and safeguarding your nest egg, call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit!
Bryan Lee is the founder and president of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With more than 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and his MBA in international finance from the University of North Texas. He is also a CERTIFIED FINANCIAL PLANNER™ professional.
Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including the Dallas/Fort Worth chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, Family Services of Plano, the CITY House, and the Journal of Financial Planning. Bryan has been featured in local and national media, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, and Dow Jones Newswires. And, he has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception and recently as a Top Wealth Manager. To learn more about Bryan, connect with him on LinkedIn.