You’ve been saving for retirement for quite some time, but you have more than a decade to go before you can finally step away from your full-time job. While it might feel far off, now is the time to evaluate how you’re doing with your savings plan and adjust if necessary.
Many wonder how much is enough when it comes to their retirement, and as you near retirement age, those funds and your needs may have changed since you first started out. By taking the time to review your approach, you can be prepared for the road ahead.
Knowing how much you’ll need to have the retirement lifestyle you envision takes more than a ballpark figure. It involves understanding several factors that will affect how far your dollars stretch. Here are the essentials you’ll need to consider.
Though spending usually depends on personal choices, there are some universal costs of living such as housing, utilities, food, transportation, and personal care. Many retirees use geographic arbitrage as part of their retirement strategy. This means they sell their primary residence at its appreciated value and either downsize or move to a more affordable state or town, banking the surplus.
Of course, others stay put, choosing instead to remain in the home they’ve hopefully paid off by the time they stop working. Remember, even if your home is paid off, your property taxes remain, and they’ll likely increase each year. Be sure to figure those rising costs into your budget.
As we age, we tend to face increased health and mobility challenges. Medicare health coverage eligibility begins at age 65, but it won’t cover everything. In fact, you’ll likely need to pay out of pocket for prescription drug coverage plans, eye care, and podiatry.
If you want to be sure to have professional care if you become incapacitated or unable to perform the activities of daily living, you may want to invest in extended care protection. The premiums for such policies can be significant, so they should be figured into your retirement income strategy.
You will have worked hard to get to retirement, and you should absolutely set out to enjoy it. Having room in your budget for hobbies, interests, travel, and other discretionary expenses is important. After all, you’ll finally have the time, so you want to also have the means to afford the experiences that strike your fancy.
Retirement savings calculators like this one allow you to input how much you’ve already saved, how much annual retirement income you’d like to have, and what rate of return you expect to receive. You can modify those numbers and others to see how the income expectations might change. It’s a great way to give yourself a range of what income you might expect based on your actions in the coming years.
For example, take a hypothetical couple named Mark and Julie. They are both 40 years old and already have $700,000 saved toward retirement. Together, they earn $300,000 and save $40,000 per year in their accounts. In retirement, they’d like to replace 50% of their current income ($150,000), and they expect to retire at 65 and require income for 30 years. At an 8% annual return, they will be quite well off in retirement. But at a 2% rate of return, Mark and Julie might run into some trouble. Of course, a calculator can’t predict the actual future, but it can return a projection based on the information it’s fed.
An often-overlooked variable in retirement budgeting is inflation, which can affect the strength of your dollars over time. A cup of coffee that’s $3 today could be $4 or $5 dollars at some point in the future. Your retirement strategy needs to account for that in a real way, and ideally, your investments should outpace inflation. Holding different types of investments in your portfolio can help diversify your risk and give you a hedge against inflation’s erosion of your purchasing power.
Historically, inflation has fluctuated. It’s been as low as -.39% in 2009 and as high as 13.55% in 1980.1 Understanding the volatility of inflation and preparing for best- and worst-case scenarios is smart. A financial professional can provide you with projections and modifications so you can be as prepared as possible.
It is never a good move to put all your nest eggs in one basket or all of your money in one account or asset type. Diversification can minimize exposure and give you the best chances of achieving your goals. A well-rounded financial strategy may include several income streams such as:
Guaranteed sources: Pensions, social security, annuities, and life insurance cash values
Qualified plans: 401(k), 403(b), IRA, Roth IRA, or other qualified accounts. Check out this 401(k) calculator to estimate your qualified retirement income.
Personal accounts: Brokerage and bank accounts
Miscellaneous sources: Health savings accounts (HSAs), business or part-time income, dividends, and inheritance.
As you may well know, the age at which you begin taking your Social Security benefits will affect the amount you receive. There are many variables that go into the calculation of benefits including your earnings history, claiming age, family benefits, and full retirement age, among others.
The Social Security Administration provides online tools and statements to help you estimate your benefits. You can register for an account where all your details are already preloaded, and you can use the calculator to see how benefits change based on your claiming age.
Your income, consistency, savings rate, earnings rate, compound interest, investment performance, market conditions, and the economy in general all influence your net worth. But there are other risks that can also impact your financial resilience in retirement. Here are a few common blind spots to watch out for.
Living a long life is a goal for most of us, but no one wants to outlast their money. Analyzing your current savings rate and expected retirement income target will help you understand if you’re on track, and if you’re not, what adjustments to savings, withdrawals, or both can get you there.
The 4% rule of thumb is a guideline that suggests retirees draw down their retirement savings at an annual rate of 4% to help their money last. Your strategy may depart from this concept, so it’s best to discuss your specific situation with a financial professional. If you are concerned about outliving your income, you may want to ask about guaranteed income options designed to last a lifetime such as annuities.
While you’re still earning an income, you may want to eliminate future debt expenses such as mortgages, consumer credit, or other loans. Prioritize repaying debt that carries the highest interest rate, and repay the next debt in its turn. Decide if you’ll sell your primary residence and downsize or move to a more affordable area in retirement and avoid taking on new debts as you get closer to the time when you’ll live off your savings.
As retirement comes into view, you’ll want to revisit your strategy to ensure the risk profile is still appropriate for your tolerance. A financial professional can help you consider a shift toward bond funds, dividends, and other potential income sources. Throughout retirement, regularly review your investment portfolio to maintain a risk level and withdrawal schedule that can help give you peace of mind.
After decades of working hard, saving consistently, and preparing consciously, retirement is a well-deserved reward that’s finally on the horizon. Now’s the time to check your progress and decide if adjustments need to be made while you still have time to make them.
An experienced New York Life financial professional can analyze and walk you through the details of your current strategy, reinforce or modify your trajectory, and help you feel in control of your journey to retirement.
1 “US Inflation Rate 1960-2023”, www.macrotrends.net, Data source: World Bank.
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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