When it comes to calculating how much money you'll need for retirement, numbers can be tricky, but concepts are a lot easier to manage. If we can understand, conceptually, the amount of income we’ll need to live a comfortable life beyond our working years, then it’s much easier to wrap our heads around the process.
Despite many Americans being stressed about the idea of retirement, a full one third of us aren’t saving for retirement at all, and many don’t have any idea of how much they’ll need to fund their golden years.
In order to reach their retirement goals, nearly one in five (17%) respondents to a recent study are relying on luck, saying they would need to win the lottery.
The truth is, and many financial planners will tell you, there is no “magic number.” This is not a one-size-fits-all equation. How much you need to save for retirement will depend entirely on your spending habits. Even someone who saves $2 million will run out of money in retirement if they spend extravagantly and don’t adhere to a budget. Whereas someone who has only $500,000 might live comfortably if they have a lifestyle that does not require much cash.
Plan Your Retirement Budget
One budgeting strategy is to plan on needing between 70-80% of your pre-retirement income during retirement. This is based on the assumption that you will no longer need to support children, you may have paid off your home mortgage, and you won’t have employment expenses like clothing, commuting, eating lunch out, etc.
However, these “savings” can easily be offset by unknown variables, such as inflation and additional unplanned expenses, especially if you plan to live an active retirement lifestyle. The future cost of healthcare is an especially big unknown. If you want to travel extensively, entertain and eat out frequently, or participate in expensive hobbies during retirement, be sure to factor these costs into your retirement cost-of-living budget.
Over time, inflation erodes the value of your money and reduces your purchasing power. As a result, a dollar in ten years will likely buy you less than a dollar today. What cost $1 in 1990 would cost you almost double that today ($1.84).
Many people enter retirement with no idea of how they will spend their time. Start thinking now about the activities and hobbies you want to pursue when you retire. It doesn’t really matter what they are, the important thing is that you have a plan designed to keep your mind, body, and financial security in good health.
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