How Much Do I Need To Save for Retirement?
You’re stashing away money in your 401k account every month. You may even be contributing to a separate IRA account. Yet the question still nags at you: Am I saving enough for retirement? If you’re asking that, don’t worry, you’re not alone. In fact, that is the most common question that we get here at Smart401k.
According to a Bureau of Labor Statistics’ Consumer Expenditures Survey, if you plan on living the exact same lifestyle as you do now, you will likely need to replace 80% of your current income annually. Of course this is a generalization and cannot be applied to everyone’s situation, but it can be a starting point. To figure out whether 80% is the right number for you to strive for, you will need to think about what kind of lifestyle you’ll be living in your golden years.
Today I’m going to introduce several factors that I believe everyone should consider as you determine your savings goal. In future posts, I will take a deeper look at some of these factors in order to help you think through your situation.
In my opinion, one of most important factors to think about is housing. For instance: Will your current home be paid off before you retire? Do you plan on buying a second home? Do you want to rent a summer home? And, are you interested in relocating to a developed retirement community? A number of these options will require you to save more than if you were to age at home (that’s fully paid for) or move in with your children or other relatives.
The next major category is out-of-pocket medical expenses. Nowadays there aren’t many employers who are extending healthcare coverage into retirement. This means that you will likely need to rely on Medicare and potentially a supplemental plan to cover everything Medicare doesn’t. The amount you will need to save will depend on whether you will have coverage through a former employer and how healthy you are. To put the potential costs in perspective, the Employee Benefits Research Institute estimates that the average person may need as much as $295,000 to cover premiums and out-of-pocket expenses in retirement.
Along with housing and medical expenses, you need to think about the major purchases you’ll make in retirement. Planning for housing repairs and upgrades, such as a new furnace or kitchen appliances, new car purchases and other major purchases will help determine your long-term expenses. For instance, if you want to buy yourself a new Corvette on your 65th birthday you will likely want to save a bit more.
Last, but not least, you’ll want to consider how much debt you will have to repay during retirement. Living on a fixed income will make debt payments even harder. If you think that you may enter retirement with the same amount of debt or even more than you currently have you’ll likely need a bigger nest egg.
Overall, the more you want to do in retirement the more you will need to save. Retirement planning is not something that you do once and then forget about. Even after you determine how much you will need, it will be important to reassess your situation regularly and adjust your plan accordingly.
I encourage you to read through our Smart Savings series and to check out our retirement calculators. These resources will give you another perspective on what you need to consider and how much you’ll need to save as you move towards retirement. And feel free to contact a Smart401k advisor directly at info@smart401k.com or 877.627.8401 if you have any other questions.
Jessica Slaters, Investment Advisor
