How Much Will You Need In Retirement?

Posted by Kerry Hannon.
Thanks to modern medicine, people are living longer. This means, many of us are going to live longer, healthier lives than our parents’ generation. On average, men and women spend seven more years in retirement than they did in 1970. Your retirement could last longer than your working years, say, thirty years or more.
Budgeting for what your spending needs will be when you’re 70, 80 and 90 years old feels like throwing darts. And that’s because there are two big unknowns that you have to account for: Your health and how long you’ll live.
A recent survey by the Employee Benefit Research Institute* (EBRI) found that less than half of workers (48 percent) report they and/or their spouse have tried to calculate how much money they will need to save to live comfortably in retirement. And many of those workers can only guess at the amount they’ll need to save.
Run your numbers. There are a couple of ways to estimate what you’ll need to retire. One option is to use an online retirement tool. Another alternative is to meet with a financial planner to develop your retirement budget and plan how your retirement savings, Social Security and any other sources of income will cover it.
Create a budget for what you spend annually right now. Make a list of your monthly expenses ranging from your rent or mortgage payment (include 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.
Figure on spending roughly the same amount annually. To get a more precise figure, multiply your total sum by inflation. While inflation rates have been low in recent years, over time they’ve varied widely. For this exercise, calculate a 3.5 percent rise in prices for the next 10 to 15 years. Medical costs increase, too. Even if you’re frugal or move to a smaller home or a town where the living expenses are far lower, you will probably need at least 80-90 percent of your pre-retirement income after you retire.
Factor in extra budget items. If you’re retiring early, you may have to buy health insurance until Medicare kicks in at age 65. There’s also non-reimbursed medical costs in retirement for deductibles, premiums and uncovered medical expenses.
Future demands on your savings may come into play depending on your individual situation. These range from short-term financial support for your adult children, providing for a child with a disability or chipping in to pay for an aging parent’s bills.
While your total savings goal may be eye-popping, keep in mind that roughly 30 percent of that amount will be discretionary spending that you can control. For example, traveling and money spent on hobbies are considered discretionary costs.
Remember spending categories shift, but generally not the total sum. In the early years of your retirement, you’ll probably spend money on travel, hobbies and other activities. As the years roll by, monthly outlays such as the cost of owning a car and maintaining it may lessen, or disappear when you hand over the keys. At the same time, out of pocket medical bills can soar and can eat up a bigger chunk of your budget. Grocery bills may decrease when children leave the nest, but these savings may be offset by your choice to dine out more often instead of preparing meals at home.
Everyone’s personal budget is unique, but one thing is universal–the sooner you get a sense of what your living costs might be down the road, the better able you can plan to help make sure you won’t outlive your money.
* The Employee Benefit Research Institute conducted the mentioned survey in April, 2015. For a more in-depth look, you can visit the study here.
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January 5, 2016