How much should I save for retirement?
As much as possible. Depending on the age at which you retire, you could be looking at 30 years in retirement. Most people need a bigger nest egg than they think.
Your own unique situation drives how much you need to have put away. Let’s take your sources of retirement income:
- Do you have a pension?
- Are your Social Security benefits going to be substantial?
- Do you plan to retire early, say age 50 or 55?
- Do you plan to work part time during your retirement?
- Are you going to assist your elderly parents?
You also need to consider your living expenses. Everyone can list food, insurance and utilities.
- Will you have a mortgage payment in retirement?
- Will you be paying for someone’s college costs?
- How often do you dine out?
- How much do you travel?
The higher your living expenses, the more you need to save for retirement to meet that lifestyle.
We’ve all heard that retirement income estimates should be based on a percentage of pre-retirement income. But what should that percentage be? The answers range from 60 to 90 percent. Unfortunately, the rules of thumb do not consider your particular retirement plans.
Will my income cover my outgo?
You should aim to have your retirement income be greater than your retirement living expenses. This means you need to project how much those future living expenses will be. Remember there will be inflation. A commonly used inflation rate is 3%. Also, keep in mind that your expenses will change over the years. You might pay off your mortgage or move into assisted living. To get started, consider the following list of common expenses.
- Housing – mortgage or rent, property taxes, insurance, yard care, repairs and maintenance
- Utilities – telephone, cable (internet and television), water, gas and electric
- Food – groceries, liquor, take home and dining out (for you and for guests)
- Vehicles – loan payments, insurance, fuel, repairs and maintenance, licenses
- Medical – insurance premiums, deductibles, co-payments, prescriptions, eye care, dental (Medicare premiums)
- Insurance – long-term care, life (other insurance is covered above)
- Gifts – personal and charitable, college funding for relatives, caring for your parents
- Income taxes – this is tricky so you might want to check with your CPA
- Travel & entertainment –trips, hobbies, other activities
- Savings – amount you want to put aside each year
- Consumer debts – credit cards, personal loans
- Assisted living –home health care aide, nursing home or other assisted living situation
- Helping relatives – financial assistance for your parents
- Other – clothing, grooming, pet care and an estimate of those miscellaneous expenses you can’t remember
Will I run out of money?
This question is like a three-legged stool.
- How old will you be when you retire?
- How long will you live?
- How much income will you have in retirement?
You must have realistic answers for all three questions before you can assess whether you are likely to out live your money.
Typically, the younger you are at retirement, the more active you will be in your early retirement years. This usually indicates more spending in the early years. Sometimes people spend more money in the first retirement year simply because they see the need for house repairs that they didn’t notice when they were at work.
The longer your retirement, the more income you will need. It is impossible to accurately predict how long you will live. One rule of thumb in the financial planning industry is to add 20 years to your grandparents’ life span. Another trick is to use age 95 or 100 as your own life span. Whatever you use, be sure you err on the side of a long life. It is better to die with some money left over than to run out of money before the end of your life.
Understand all your sources of retirement income. You might have a pension that will pay you a monthly benefit. Other sources of retirement income include a 401(k), a 403(b), IRAs, annuities or other investments. If you have investments in mutual funds, stocks or bonds, do you fully understand the investments and your risks? Some investors feel they are diversifying their investments by putting them at more than one institution or with more than one investment advisor. If you are one of these and your various advisors are not aware of all your investments, you can easily be invested in the same stock over and over. You may think you are diversified when you are not.
As for pensions, some require you to choose among options for those benefits, depending on provision for your surviving spouse. The options provide varying monthly benefits.
If you have a pension, do you know how safe it is? Keep up with the financial news about your pension. If it becomes at risk, you will want to know early so you can adjust your retirement funding or change your plans.
The same concern applies to annuities. Understand your annuity and your rights in the event that your annuity company fails. The following informative articles can be found on the Texas Department of Insurance website.
Understanding Annuities: http://www.tdi.state.tx.us/pubs/consumer/cb078.html
If My Insurance Company Fails: http://www.tdi.texas.gov/pubs/consumer/cb006.html