Retirement is likely the largest savings goal of your life.
Throughout your working years, you need to save enough money to support your ideal retirement for a couple of decades or more without a regular paycheck. It’s an enormous and incredibly remarkable feat.
A common roadblock for many pre-retirees is knowing how much they need to save for their golden years. The problem? Many people drastically underestimate how much their dream of retiring to the beach will cost them.
Today, we’re going to tackle why retirement is so expensive and concrete strategies to help you build a robust and healthy nest egg.
How much should you save for retirement?
This is perhaps the most asked question in the history of retirement planning—how much do you need to save for retirement?
Like many other answers to financial questions, the most accurate is that it depends. Your retirement savings plan will look different than your parents, children, and other loved ones. Why? Your plan should be designed to support your goals, dreams, and priorities, all of which will differ from the person sitting across from you.
Retirement plans don’t come with a uniform price tag.
Your goal to move near family might cost a lot more in terms of moving expenses, housing, cost of living, etc. than another couple who wants to downsize to a beach condo a couple of counties south.
As a general rule of thumb, many financial experts agree that you should be able to replace 80-90% of your pre-retirement income to sustain a similar lifestyle. Let’s say that you spend $5,000 per month. To help maintain that lifestyle, you’d need anywhere from $4,000-$4,500 available to spend per month.
Again, this is just a generalization but it can be beneficial as you start to examine your current spending habits and the level to which they might (or might not) change in retirement.
Where retirees tend to spend more.
In your golden years, it’s easy to spend money. But certain categories tend to require greater spending from retirees than others. Let’s take a closer look.
On average, retirees spend about $11,000 per year on travel costs. Trips can be costly, especially as you age because you might require specific accommodations and could be less likely to travel on a budget in the same way that you were in your 20s (goodbye hostels).
Travel insurance (to cover medical needs) can also add to the overall expense. Decide on what your travel goals are and what those goals cost. A week in the Florida Keys will be different than a week on the Almafi Coast, for example.
Retirees can expect their healthcare costs to rise—dramatically. Fidelity estimates that a retired 65-year-old couple will spend $295,000 on medical costs in retirement excluding long-term care (which can run hundreds of thousands of dollars per year). This figure amounts to about 15% of your total budget. Retirees must make a plan to pay for these expenses.
Why are costs rising?
Healthcare costs have outpaced inflation by double just in the last couple of years. This, coupled with the fact that retirees tend to require more medical attention, yields higher overall costs.
Moving or relocating
Thinking about moving or splitting your time in retirement? That choice comes with some significant costs. You’ll need two different living arrangements (including upkeep and maintenance), transportation costs, general living expenses, moving costs, and more.
Retirees tend to have more time, and time equals money after all. More free time could lead to more meals out, social gatherings with friends, memberships, entertainment, and more.
While different for everyone, many retirees spend more in their first few years after transitioning into retirement. It’s usually early on where they make a big move, take a dream trip, or purchase a bucket-list-worthy item.
Find your retirement “number”.
How can all of this information help you plan for spending in retirement?
It leads you to create your ideal retirement number. Your number represents what you’d like to spend in any given month or year. How can you find your retirement number?
- Know how much you’re currently spending.
- While this might sound basic, many people don’t know how much money they actually spend month to month. As you near retirement, start to take a closer look at your financial habits. This will further illuminate what you’ll need to maintain your current standard of living.
- Project where your spending will differ.
- Right now, you might not split your time between two places. If you intend to do this in retirement, get a true sense of how that will fit into your spending plan. Will other expenses need to be less to offset added travel, maintenance, or storage costs?
- Let your goals and values guide you.
- Your financial choices should be grounded in the things that matter most to you. Perhaps in retirement, you want to dive deeper into charitable giving. That’s an incredible goal, one that might require you to shift other spending tendencies to make work.
Be honest and open with yourself, your spouse, and your financial planner in this process. Know what you are and aren’t okay with. For you, 80% of your income might come with too many sacrifices and you want to replace 100% of your income.
In this case, we’d work with you to intentionally ramp up your retirement savings in smart and strategic ways to help you reach that goal.
We help you build the retirement plan of your dreams.
You and your spouse have worked hard to retire in a manner that suits your goals and values. It’s our joy to help you craft a plan tailored to reaching your dreams. Live your life with authenticity and we’ll help create a plan that supports that vision.
Would you like to discover your retirement number? Let’s talk about it together. Schedule a call with our team to learn more.