Those in the workforce dream of the day when they will be able to officially say goodbye to the grind. No more getting up early to commute to the office and work for eight hours a day (or more!). Retirement certainly has its perks, but can be financially overwhelming if you are not prepared for what you’ll need.
While you may think that you have time before you need to start saving money for retirement, it is never too early to start. In fact, financial advisors recommend that you begin saving as soon as possible. You should also begin to think about a plan for life after you finally retire. Here’s what you need to consider as you calculate what you will need in retirement.
Identify Your Needs as a Retiree
The first step in calculating the amount of money you’ll need in retirement is determining how much you’ll need to actually live on. Financial experts believe that you won’t need as much income in retirement because you likely won’t have as many expenses. You won’t be spending money on work-related expenses like transportation, gas, or lunches. You also may not have a mortgage payment if you manage to pay off your home by then. If you have children, they will likely be living off on their own, so you won’t have to spend money to support them. That means spending less money on food, clothes, and other items. However, though some expenses may decrease, you may need to spend more money on other things like medical expenses and prescriptions or household tasks that you may not be able to do on your own.
Looking at your current expenses will help you have a better understanding of what you will be spending in the future. This is the time where you need to be honest about your needs in retirement. According to Wells Fargo, there are two kinds of “needs.” You have your basic needs, which are your necessities like food, housing, transportation, health care, and other essentials. Then there are discretionary needs, which vary based on the retirement lifestyle you choose to live. Some retirees may want to do more traveling or go out to different events. However, these activities, though they may be important to you, are not essential. Retirees should evaluate their basic needs, discretionary needs, and budgetary adjustments that should be made for the future.
Analyze Your Current Savings
In addition to looking at your anticipated needs in retirement, you should analyze your current saving habits. Most people who work are able to contribute to a retirement savings plan through their employer. Sometimes, companies also contribute a certain amount to your retirement savings plan based on the amount that you are contributing.
According to Fidelity, you should be saving at least 15% of your pre-tax salary for retirement. That’s also assuming that you have begun saving at an earlier age with plans to retire at around 67. If you want to retire earlier, you will likely need to save more to handle your anticipated living needs.
Though this rule of thumb for retirement savings is just a suggestion, many Americans honestly can’t afford to set aside a full 15% of their income for retirement. The important part is to start as early as you can and grow by investing in 401Ks, IRAs and other investments. Keep in mind, though, that financial planners estimate that retirees will need to replace around 80% of their preretirement income. However, that amount could be less or more depending on your spending plans.
General Rule: Multiply Annual Spending by 25
There is one general rule about the set amount of money you will need to save to live out the rest of your days. To figure out that amount, you multiple your current annual spending by 25. That’s what your savings will have to be in retirement to allow you to withdraw 4% of that amount every year to live comfortably on. For example, if you currently spend $40,000 a year, then you will need a savings portfolio that’s 25 times $40,000. That would equal $1 million as you retire.
Some people may not have to rely completely on savings, however. In addition to Social Security benefits, some retirees may receive pension plans to add a bit of extra income into their pockets each month. Some may do light consulting or another side job to earn more income. Working with a financial retirement planner will help you to determine how you should save and spend to live comfortably after you retire.
What to Do If You Start Saving Late
Though there are strong suggestions from experts to save as early as possible, some people may get started saving for retirement later in life. They also may not have enough income to save the recommended 15% of their annual salaries. Even if you have a late start to your plans for retirement, you can catch up.
First, identify places in your monthly budget where you can contribute more to a 401k or an IRA. Cut out as many unnecessary expenses as you can and devote that money towards retirement. Start small with cutting out subscriptions, memberships, and restaurant visits. Another way to catch up on retirement savings is by working towards a new job with a higher salary (while still living within your current expenses). You can also try adding a stream of income to help with saving. You can also work with an investment professional to help guide you into the world of stocks, bonds, and other investment strategies to add additional income.
If you find yourself really behind, you may have to consider holding off on retirement for a few more years to earn more income. That’s not the ideal solution for everyone. However, if you are able-bodied and don’t mind working for a bit longer, that will help you to achieve your retirement goals. Whether you start early or late, preparing for retirement can be done. You just have to make a commitment to focus on your long-term needs rather than your temporary wants.