You know it is important to plan for retirement, but what does that mean and how do you start? The answer is not “one-size-fits-all”, but here are some things to consider to get you started in the right direction.
How much money do you need to retire?
The answer to this question depends on your personal needs and circumstances. When you read anything about retirement planning, you’ll likely see the desired annual retirement income discussed as a percentage of your current income. Depending on where the information comes from, that percentage could be anywhere from 60%-90%. This approach comes from the idea that your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to account for certain expenses you’ll no longer have should, in theory, allow you to sustain your current lifestyle. Unfortunately, this simple method doesn’t know if you plan to travel extensively or live off grid, so while you can use it as a benchmark, you’ll need to really think about how your personal expenses might change over time as you transition into retirement.
If you are a long way off from retirement, it might be hard to come up with a list of expenses you might encounter, but here are a few to get you thinking:
- Housing and Living Expenses (rent or mortgage payments, property taxes, property upkeep and repairs, utilities, rental, or homeowner’s insurance, etc…)
- Transportation (car payments, auto insurance, gas, maintenance, public transportation)
- Healthcare (medical, dental, and vision insurance, long term care for you or family members, deductibles, co-payments, prescriptions, etc…)
- Food and clothing
- Entertainment (travel, dining out, hobbies, leisure activities, club memberships, etc…)
When do you want to retire?
While the average retirement age has shifted a bit through the years, most people still retire some time in their 60s or 70s. Also, because of advances in modern medicine, life expectancies have increased which means you’ll likely have more years of retirement to enjoy, but also to fund.
You might not know exactly when you want to retire, but you should try to have a general idea so you can adjust your savings goals for specific ages and locations. You might find yourself in a low-stress position that you genuinely enjoy and want to work a few extra years to put more savings aside. This works out to fewer years where you are living solely off your retirement income but adjust accordingly.
Where do you want to retire?
Where you plan to retire plays a big part in how much money you’ll need to save to live comfortably during your retirement. Cost of living is the most basic element in this piece. While dipping your toes in the sands and seas of Hawaii may seem like the perfect way to spend your days, it comes at a premium and you’ll need to plan for that. On the other hand, some places have a low cost of living and your savings would go much further.
Another retirement savings based on location to keep in mind is taxes. Each state has its own tax codes, and some have no income tax at all. This means if you withdraw funds from an account such as a 401(k) in these states, you won’t have any state income taxes taken out. Although, be careful to check into property taxes as well since states with no income tax can have very high property tax.
Are you prepared to retire?
Once you have an idea of your retirement income needs, you’ll want to assess how prepared you are to meet those needs. In other words, where will your money be coming from? You can think of your retirement income in two ways: money that you earn while working and money you make now that will pay you going forward. It is your Social Security or a corporate pension plan if you are fortunate to have one. It is income from businesses that you’ll sell or properties you’ll purchase for rental income. It is your 401(k) or other retirement accounts, and your IRAs. It is your nest egg.
This is a point in the planning process where many retirees experience a good bit of anxiety. You want to turn that nest egg into cash flow. This is money you’ve worked your entire career for and now it is time to make your money work hard for you. If your current plan doesn’t seem to be working, try a different way of planning. If it still doesn’t seem to be working, you can always reach out to a financial advisor or feel free to ask us a question and we’ll get back to you.
What if you don’t feel prepared to retire?
Sometimes life doesn’t go perfectly, and our expected income sources just won’t be enough to fund our desired retirement period. Don’t panic—there are things you can do right now to help bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:
- Try to cut current expenses so you’ll have more money to save for retirement
- Lower your expectations for retirement so you won’t need as much money
- Work part-time during retirement for extra income
- Postpone your retirement party for a few years (or longer) to give yourself more time to save
What if I have already retired and I’m struggling?
First, no matter how hopeless it may seem and how discouraged you may be, there is help and hope. Bad things happen to good people, and many are left in perhaps similar situations to where you are right now. Even the best plans have unforeseen outcomes. The best thing you can do is reevaluate and reach out to an advisor. Feel free to send us any questions you might have, and we’ll get back to you!