Is your retirement in sight? If so, congratulations! You’ve worked hard to grow your nest egg. You deserve to live the next chapter of your life on your terms.
Before you completely call it quits, though, there’s some planning you’ll want to do to make sure you can actually afford to start your golden years. Specifically, you’ll want to figure exactly how much money you’ll need in retirement.
Here are some tips to get you started.
Start with the obvious
The money you’re spending on living expenses now? You’ll likely be spending somewhere around that amount once you retire.
Think about it. You’ll still need groceries, eat out at restaurants, and have to pay your utility bills. If you own a car now, you’ll likely continue to drive one even if you’re not commuting to work. That means you’ll need auto insurance and might even be making a regular car payment. If you’re not a car owner, budget for related costs like public transportation and ride-hailing. You may also want to purchase supplemental health insurance to cover medical costs that Medicare doesn’t.
Now add up all of your monthly expenses — all of them. Don’t forget your cell phone and cable TV bills, or your streaming services.
Then, there’s the unscheduled, irregular costs you’ll be incurring. These include money spent on clothing, gifts, car repairs, home repairs, and the like. Don’t forget pet-care costs, either, if necessary.
There’s now a slight but important adjustment to make. That is, deduct the costs specifically linked to working. Commuting costs should account for most of this spending for most people, but also bear in mind how much you spend on clothing specifically for (and only for) work.
Now, you’ll want to add an expense to your line-by-line budget. That’s the amount of money you’ll be spending on things like new hobbies, entertainment, travel, and other interests you want to pursue in retirement.
Perhaps the trickiest retirement expense to plan for is also the biggest expense for most of your life. Specifically, what it will cost you to live where you want? If you’ll be staying in a home that’s already paid for — or will be paid for by the time you retire — great! That’s one fewer bill to pay. If you’re a renter or will be making house payments during retirement, though, it would be wise to make sure it’s an expense you can cover. That’s especially true if you’re renting and face the possibility of ever-rising payments.
Done all that? If you’re like most people, the monthly figure should be somewhere between 80% and 100% of your current monthly spending.
Rule(s) of thumb
The bottom-up budgeting approach described above is a smart place to start fleshing out your retirement spending plan. It’s not the only math you want to consider doing before you call it quits, however. There are a couple simple rules of thumb that will help you get a handle on your future spending.
The first of these is a target-savings multiple based on your current annual income. Financial planners suggest you’ll need anywhere between 10 and 25 times your current yearly salary in retirement savings if you wish to maintain your current standard of living once you stop working.
That’s a wide range, but it reflects the reality that no two retirees are quite the same. More specifically, that wide range must capture the different ways retirees invest and save. It’s possible for a portfolio of dividend-paying stocks to generate just as much income as a portfolio of treasury bonds that’s twice as big. The former will also experience growth in the long run, at the expense of greater volatility. The bond portfolio’s value will be much more consistent, but it won’t experience as much capital appreciation.
In other words, don’t sweat it too much if you’re going to save up only 10 times your final year’s wages. Conversely, don’t be too quick to celebrate amassing 25 times your annual income. You’ll still want to manage that money well, maximizing its productivity while also managing its risk.
The other helpful (and related) rule of thumb? You can withdraw on the order of 4% of your retirement savings per year and still make it last as long as 30 years.
Again, that’s a very loose rule with room for lots of variation. Your magic number might be 3% or maybe it’s 5%. If you invest well and achieve good, consistent growth from your retirement nest egg, it’s possible your savings will outgrow your withdrawals. Mismanage that money, and it might not last as long as you need.
The key, of course, is continuing to invest appropriately for your goals, and adjusting your portfolio over time.
Also bear in mind that you’ll likely be getting at least some Social Security to help out with retirement costs, even if it’s not going to be a great deal of money.
Even a simple plan is better than no plan at all
It’s impossible to predict the future. While you can take the time to come up with a number that ends up being quite close to what you’ll need, you’ll almost certainly end up making adjustments to your budget after you’ve actually retired.
Not preparing as detailed a budget as you possibly can right now, however, is a potential recipe for disaster. There’s nothing more heartbreaking than learning you retired too soon, without quite enough saved to support the retirement you’ve been dreaming of. Even just a few minutes writing out a specific plan is time well spent, if only to establish a savings target.