By Jonathan Harner, CFP®
Have you ever thought about whether or not you will have enough money to retire comfortably? This is an important question, one that many people don’t take the time to consider. They just assume they will have enough in the bank to continue living their current lifestyle. But you have dreams and goals for your golden years, and what you have saved so far may not be enough to fund your ideal retirement lifestyle. So how much money will you need to retire comfortably? The answer may surprise you.
The amount you will need to retire comfortably will be unique to your situation, goals, and a variety of other factors. Most experts say you should expect to spend between 55-80% of your pre-retirement annual income per year during retirement. Whatever your goals, it’s important to have an idea of how much they will cost. The following questions can help when determining your magic number for your unique retirement.
1. What’s Your Ideal Retirement Date?
Your age (now and in retirement) is one of the most significant factors to consider when determining how much money you need to save. If you want to retire early, you’ll have fewer years to save for a longer retirement. And if you start claiming Social Security benefits before full retirement age, you’ll also have to factor in a smaller monthly benefit amount.
The state of the stock market can also play a role in how much money you need and how long your money lasts. A Vanguard study found that you have a 31% higher chance of running out of money if you retire near or during a bear market. Of course, you have no way of knowing if you’ll be in a bear or bull market when you retire—but this is a scenario you must account for in your retirement planning. Every plan we create for clients is made with market downturns in mind.
2. What Do You Want Your Retirement Life to Look Like?
Have you thought about the type of lifestyle you want to have in retirement? If you know you want to travel, play golf, or spend time with your grandkids, you need to factor in what that looks like and how much it will cost.
For example, if you plan to travel, you’ll need to consider:
● Will you be traveling stateside or internationally?
● How often do you want to travel?
● How would you like to get there? (e.g., car, plane, or RV)
● Where would you like to stay? (e.g., 5-star hotel, Airbnb, with family members)
● Will you be traveling with your family? Would you like to cover their expenses too?
● Will you maintain your primary residence? If so, who will watch your house and maintain it while you’re gone?
Even if your dream is simply to spend time with your grandkids, you’ll still need to think through your expectations and expenses. To some people, “spending time with grandkids” means babysitting a few times a week. To others, it means footing the bill for all-expenses-paid trips to various destinations of their choosing. Whatever it is you want to do with your time, map out the details so you can have a clear picture of how much you’ll need to make it a reality.
3. Will You Earn an Income in Retirement?
Working during your retirement is a great way to stay active, keep your mind sharp, and maintain a sense of purpose. Some retirees choose to build a second career through consulting. Others decide to pick up a low-stress, part-time job at a family office or retail store. No matter what you do, if you plan to work during retirement, you won’t have to save as much to live comfortably.
4. How Much Debt Do You Carry?
Bringing debt into retirement has two major drawbacks:
- It reduces the amount of cash flow you have for housing, travel, hobbies, and other non-essential purchases.
- It can potentially drain your retirement savings quicker, which means you may run out of money or have to adjust your lifestyle down the road.
If you carry debt, take a close look at what you owe and figure out how much cash flow you’ll need in retirement to cover these expenses. Some people prefer to pay off any high-interest consumer debt before they retire. Others will take it one step further by paying down their mortgage and auto loans too.
On the flipside, if you are already retired, you may NOT want to pay off debt faster depending on what funds you have to use. For example, withdrawing extra funds from an IRA or 401(k) could increase your tax bracket.
5. What Kind of Healthcare Coverage Do You Expect to Have?
Right now, you most likely have health insurance through your employer. When you stop working, you’ll need to have a plan for healthcare coverage another way. You may be able to hop on your spouse’s plan if he or she is still working. Or you can get coverage through the healthcare marketplace. You qualify for Medicare starting at age 65, but even then, you may want additional coverage to pay for prescription drugs, dental care, eye exams, and other expenses.
Retirees sometimes fail to fully plan for expenses during the later stages of retirement, and healthcare often tops the list. It’s estimated that retirees will use 15% of their income for health expenses, and the average retired couple could see healthcare expenses of approximately $300,000 after age 65. Don’t let this be a planning oversight that prevents you from retiring comfortably!
6. Will You Have Any Dependents?
Your kids may be grown and out of the house by the time you retire, but that doesn’t necessarily mean you’ll stop supporting them financially. Over 79% of parents said they still give financial support to their adult children (ages 18 to 34), according to a Merrill Lynch study, and the COVID-19 pandemic caused a boomerang effect, with 67% of adult children still living at home with their parents after returning home in need of financial help.
And even if you aren’t helping your kids out with daily expenses, you may want to contribute to their weddings or down payments on home purchases down the road.
7. Where Will You Live?
Housing may be your biggest expense in retirement. And even if your home is paid off, you might want to consider downsizing to a smaller place that requires less maintenance and has cheaper utility costs.
To save even more, you can think about relocating to an area that has an overall lower cost of living. For example, the cost of living in Wichita, KS, is 10% lower than the national U.S. average. But if you move to Topeka, the cost of living drops to 15% below the U.S. average, saving you even more for your retirement.
8. What Is Your Family’s Health History?
The average 65-year-old man is expected to live to age 83 and a 65-year-old female is expected to live to 86. While life expectancy is unpredictable, if your family has a strong history of living to age 90 and beyond, your chances of living that long are greater. In this case, you’ll need to determine if your planned retirement savings will last long enough.
Similarly, if you have known health conditions and/or a family history of health problems that could affect your life span, you’ll want to consider this too.
Your Unique Retirement Needs a Unique Plan
There’s no one-size-fits-all approach to retirement planning. Sure, it would be nice to have a simple formula to tell you the exact amount needed for your ideal retirement. But determining your magic retirement number requires a deep dive into your financial situation, family history, and goals.
At Wichita Wealth Management, we provide holistic wealth management services for pre-retirees and retirees who want to focus on what’s most important to them. If you’re ready to work with a trusted financial partner to help you determine how much you need for your ideal retirement, we would love to work with you. Get in touch today by booking a free 15-minute intro call with me on my Calendly page here.
Jonathan Harner is a CERTIFIED FINANCIAL PLANNER™ practitioner at Wichita Wealth Management, a fee-only, fiduciary financial advisory firm dedicated to helping its clients thoroughly prepare for retirement. Jonathan’s goal is to simplify the complex so his clients can experience confidence and peace of mind as they work toward and live out their retirement dreams. He specializes in developing and implementing tax strategies that maximize his clients’ money and builds a tax-efficient withdrawal plan for retirement. Jonathan loves finding opportunities for his clients to save money and is dedicated to continual learning and growing in his profession so he can provide solutions for his client’s financial needs. When he’s not working, you can find Jonathan spending time with his wife, Annie, and their daughter, staying active in his church community, and participating in his two favorite (but vastly different) hobbies: CrossFit and Dungeons & Dragons. To learn more about Jonathan and how he can help you, connect with him on LinkedIn.