According to the U.S. Department of Labor, fewer than half of Americans have calculated how much they need to save in order to have a comfortable retirement. That number can be a real eye-opener, especially when you consider that the average American spends 18 or more years in retirement, according to the U.S. Census Bureau.
This is why it's important to take the time now to get a better understanding of how much money you might need going into retirement to ensure that you save enough to retire on your terms.
Data courtesy of U.S. Department of Labor
80 is becoming the new 60
It used to be that people didn't live very long once they retired. Not so any more. In fact, millions of baby boomers are living longer and enjoying 20 plus years of retirement. As you prepare for retirement you may want to be mindful of the following:
- The earlier you start saving, the better.
- Don't count on Social Security to be your only source of income during retirement.
- Starting late is better than not starting at all.
- As health care advances help you live longer, plan now to save so you can live well in those extra years.
- As you plan, set extra savings aside for possible inflation and increased taxes.
For some, making the decision to live below your means while saving for retirement can be a wise choice, allowing you to attain your retirement goals and to live well long after your employer hands you your last paycheck.
Questions to ask yourself about how much you should be saving for retirement:
- Do you plan to “age in place” (remain in the same home when you retire)? If so, will your mortgage be paid off by the time you retire?
- Do you want to work part time in retirement (potentially reducing the amount you'll need to save)?
- Will your kids (or your parents) need financial help from you?
- Should you consider moving to a less-expensive area or downsizing to a smaller home and using home equity for investments or retirement income?
- And what about that new roof (or other unexpected expenses that will come out of your emergency fund)? Will you pay for that before or after you retire?
Do some math
Many retirees underestimate what expenses will be in retirement. The average monthly Social Security benefit received by retired American workers is only about $1,4131.1 How much more will you need to live the way you want?
One rule of thumb is that you may need 80 percent of what you make now in retirement, but unexpected things could sink your retirement ship if you don't plan ahead:
- Rising health care costs and supplemental health insurance premiums
- In-home care or long-term care costs (have you considered long-term care insurance?)
- Worst-case scenarios such as turmoil in the stock market, declines in home equity, and major medical bills
- Funeral costs
Consider life insurance coverage options so that unexpected events such as major medical bills, lawsuits, long-term care, or the death of a spouse or life partner don't wipe you out financially (either before or during retirement).
Diversify your retirement savings to minimize risk. Adjust your retirement planning through your working years with the help of a qualified professional.
Plan accordingly and try not to overspend during your retirement. For example, if you save $1 million, that's only about $33,000 of income a year over a 30-year retirement.
If your employer offers a 401(k) plan contribute as much as you can afford.
Consider opening a traditional or Roth IRA and making regular contributions.
Retirement can be expensive. So if you're already saving, keep up the great work! If you haven't started saving, then now's the time to get started. Make a plan, set some goals, and stick with it. It's never too early or too late to start saving.