How much will I need in retirement?

Breaking down the answer to the big question.

If forecasting your retirement expenses feels so daunting that you haven't even tried, you're in good company. According to a recent surveyOpens in a new window1 by the Employee Benefit Research Institute, only 42 percent of workers have tried to calculate how much money they will need down the road—and many of them could only guess.

Clearly, having your finances squared away before retirement can give you confidence now and improve your quality of life when you get there. But trying to do so can be more difficult than it's ever been before, for a few reasons.

For example, thanks to gains in modern medicine, people are still living longer—meaning more time spent in retirement than previous generations. If you retire at age 65, that time could add up to three decades or more—longer than you actually worked—and long after you've earned your last paycheck.

Predicting your cost of retirement, especially with so many unknowns ahead, may leave you wishing for a crystal ball. But below are some common considerations for how to plan for retirement expenses and some tips and strategies for addressing them.

1. You don't have to do it alone.

Part of the inertia you may feel attempting to estimate your retirement expenses is not knowing where to start. The good news? You don't have to do it yourself. One option is using an online retirement tool, like a retirement expenses worksheet or calculator. Both can help you identify essential versus discretionary expenses and give you a realistic picture of where you could cut costs. Eliminating expenses like dinners out, club memberships, even dry cleaning can mean significant savings.

Meeting with a financial advisor is another step you can take to begin the estimating process. By talking through your retirement goals with you, an advisor can help you develop your retirement budget and determine how your retirement savings, Social Security, and other income sources will cover it.

Keep in mind that while your expense/income ratio may appear eye-popping at first, roughly 30 percent of that amount is generally discretionary spending you can control. Fewer extravagances for the grandchildren could quickly get you back on track.

2. Create a retirement "vision"—and potential budget.

A more precise approach to estimating for then is to start with what you spend now. Make a list of your monthly expenses: rent or mortgage (including property taxes), utilities, groceries, health insurance, and entertainment. Don't forget miscellaneous expenses like your gym membership, haircuts, and vet bills. Leave no stone unturned.

If you have a spouse or partner, it's important to plan together for your retirement, including expenses. Some questions to consider:

  • How will your roles and responsibilities change?
  • How much "togetherness" does each of you want and need—and how might that impact the amount of physical space in a future home?
  • Factor in health and medical considerations.
  • What responsibilities and obligations do or will you have for adult children, aging parents, or grandchildren?
  • Where do you want to live? Geographic location, proximity to family, climate, and cost of living should all be considerations, as well as ideas about social life, friends, and community.

Consider any impact on expenses your answers might pose as you plan and revisit your "shared vision" once a year, so it's always in sync with your current situation.

3. How do your estimated expenses and income affect your decision to retire?

Based on the figures in your planning, you may find you're happily closer to retirement than you first thought. However, a healthy retirement account balance is not the only factor in ensuring a financially sound future. For example, if you decide to retire early, you may need to pay for your health insurance until Medicare kicks in at age 65. Even if you're covered under a spouse's policy, costs like deductibles, increased premiums, and non-covered services can pose significant expense. And other unforeseen demands on your savings may come into play, like short-term financial support for an adult child or helping to cover an aging parent's bills. The possibility of being unable to offer financial help to a loved one could keep you on the job a bit longer, but you'll rest easier knowing you can provide the support.

4. Take inflation into account.

Inflation is a real concern when trying to plan for future expenses. While inflation rates have been low in recent years, they've varied widely over time, and higher prices mean reduced spending power. It's impossible to predict future inflation but planning for a 3 percent increase annually for the next 10 to 15 years will provide a workable estimate you can factor into your expenses.

5. Know how much you spend in retirement probably won't change, but what you spend on will.

If you've been a careful spender, you'll likely continue to be so. Know that new expenses like household help, in-home care, or transportation may eventually come into the picture. Healthcare costs for retirees are typically higher, too, and you may find out-of-pocket medical bills gradually increase. So, it's best not to bank on a meaningful drop in spending in the latter decades of retirement.

6. Estimate your retirement income.

Now that you've identified your basic retirement expenses, begin reviewing potential income sources to cover them.

ocial Security and pension plans are considered guaranteed sources of income, and it's important to develop a plan to get the most from them. Start with Social Security, which is your foundational income. Look at your most recent estimate—available on the  Social Security websiteOpens in a new window —to determine your approximate benefit, and have your spouse or partner do the same. Keep in mind the amount of your monthly payout will depend heavily on when you start claiming your benefit—in general, the longer you wait, the larger your monthly payment. Additionally, Social Security is one of the few resources that provides regular cost-of-living adjustments. As the cost of living in retirement rises over time, your benefit should increase as well, meaning it's smart to delay your payments as long as possible to maximize their overall value.

While defined benefit retirement accounts—also known as pensions—are largely a thing of the past, they also fall under the heading of guaranteed retirement income. If you are fortunate enough to have a pension fund with your employer, be sure to include that in your calculations. Your plan administrator can provide you with an estimated benefit analysis—similar to that offered by Social Security—to give you a better idea of your payments.

In an ideal world, your guaranteed retirement income would be enough to cover your essential expenses each month—an "income floor," so to speak, that will always support you. Realistically, however, if Social Security is the only regular income you expect to receive, you'll need to develop ideas for cutting expenses or creating additional guaranteed income.

7. What about your retirement savings?

IRAs and 401(k) and 403(b) accounts are considered retirement savings accounts. Because their balances depend on their underlying investments' performance, they can fluctuate in value, making them less dependable than Social Security or pension payments, but essential building blocks for retirement income with growth potential. You'll most likely need to use withdrawals from these accounts during retirement. Still, by using them to pay for necessary expenses, you could run the risk of eroding your savings faster than you anticipated. Most financial experts advise withdrawing no more than 4 percent of your investments' value each year in retirement—and some recommend less during a market downturn.

8. Consider turning your savings into lifetime income.2

No question having a source of guaranteed income in retirement creates confidence. While few people are fortunate enough to have pensions these days, there is a similar vehicle available to everyone, offering a guaranteed income. With this retirement product, you can convert a lump sum of money—such as IRA, 401(k), or 403(b) balances—into a steady stream of regular payments. Annuities also offer you a choice of distribution methods, including a lifetime income option, meaning you will never have to worry about outliving your money or answering the question, "How long will my retirement savings last?"

This calculatorOpens in a new window  can give you an idea of what lifetime income might look like. Add that estimated income to your guaranteed "income floor" to see if it brings you closer to creating the retirement you want.

9. Closing the gap

After estimating, cutting, and calculating, you still find yourself with a gap between expenses and income for retirement. There are several steps you can take.

Reduce retirement expenses. From big things like relocating to a less expensive area or smaller home to smaller actions like selling your second car or paring back discretionary expenses, you can make your retirement dollars go further simply by cutting potential costs.

Consider "gradual" retirement. Rather than retiring "cold turkey," consider the possibility of working a reduced schedule or even trying a second career in consulting or another area of interest. In addition to its financial benefit, keeping some work structure in your life can keep you engaged mentally and socially, and continue to provide you with purpose and personal satisfaction.

The perfect retirement begins with a plan

Everyone's vision for retirement is unique. Whether you see yourself traveling the world, pursuing your dreams in a second career, or settling into a cozy home with grandchildren nearby, one thing is certain: planning can help you figure out how to pay for it. The sooner you get a sense of your retirement expenses—and have a strategy for meeting them comfortably— the more likely you are to look forward to the future with confidence.

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1 ©2019 EBRI/Greenwald Retirement Confidence Survey

2 Annuities are designed for retirement and other long-term goals. They offer several payment options, including lifetime income. Guarantees are based on the claims-paying ability of the issuer. However, payments from variable annuities are not guaranteed and the payment amounts will rise or fall depending on investment returns. If you choose to invest in the variable investment products, your money will also be subject to the risks associated with investing in securities, including loss of principal. Withdrawals of earnings from an annuity are subject to ordinary income tax plus a possible federal 10% penalty if you make a withdrawal before age 59½. The value of a variable annuity is subject to market fluctuations and investment risk so that, if withdrawn, it may be worth more or less than its original cost.

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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.