Saving for retirement is probably one of the biggest financial goals people will make in their lifetime.
Yet, more and more people are woefully underprepared for those later years. In fact, a recent survey estimates that a whopping 64% of Americans are not prepared to retire.
The problem?
Many people are simply overwhelmed and don’t know how to save for retirement. So instead, they focus on short-term goals, while inevitably putting off the long-term ones.
To set you up for success, we’re sharing a few easy-to-understand steps to apply to your retirement savings strategy. Although every retirement will look a little different, these steps will give you the extra boost of confidence you need to wisely prepare for your specific situation.
Let’s dive in.
Estimate how much you will spend in retirement
How much will you need in retirement?
Well, it depends. Each of us will experience something different in retirement. That’s why it’s critical to sit down and determine how much you will be spending. Not your neighbor. Not your best friend. You.
If we were just going off a general estimate, Fidelity estimates that most people will need between 55% and 80% of their pre-retirement income in retirement. And the U.S. Bureau of Labor Statistics reports that people between 65 and 74 spend roughly $50,000 per year.
Although it’s a good idea to have these numbers in the back of your head, it’s important to estimate your expenses based on your own, unique experiences. How do you plan on spending your retirement?
Not sure? If you haven’t already, read our blog on tips for finding your purpose in retirement.
Your retirement expenses
Start by figuring out how much you’re spending now. Remember the smallest details — this could be everything from carpet cleaning to life insurance. Take note of that number. Bonus — if you already have a budget, this step should be fairly easy.
Then, add any other expenses you may have in retirement that you’re not currently paying for.
Don’t forget:
- Long-term expenses like retirement home facilities
- Health care expenses and taxes
- Plan for at least 25 years in retirement
- Adjust for inflation
And finally, remove anything that may not apply in retirement (such as a mortgage payment — if your house will be paid off).
To help create your retirement budget, ask yourself questions like:
- Will I be paying a mortgage in retirement?
- Do I plan to downsize (if so, utilities could be less)
- How will my health insurance expenses change?
- Will I need to pay for out-of-pocket medical expenses?
- How much money do I plan to spend on travel and hobbies?
- Will I have a car payment? How much do I plan to drive?
Keep in mind: while healthcare spending generally increases with age, clothing and transportation costs generally decrease.
Estimate how much you need to save
How much will you need when you retire?
Well, this depends on a variety of factors, including age you plan to retire, how long you expect to live, and how much you spend in retirement — just to name a few.
Many people are shocked to learn how much — or how little — their monthly income will be based on their savings. According to Merrill Edge, if you save $300,000 by 65, your annual income from those savings will be $12,060. If you save $1,000,000 by 65, you will bring in $40,200 annually. And if you save $1,500,000 by 65, you will make $60,300 a year. This is determined by a variety of factors, but knowing these numbers is a good place to start.
So how much do you need to save for retirement?
Some experts have suggested good rules of thumb, like $1 million or 80% of your annual pre-retirement income. Others recommend saving 15% of your pre-tax income, including your employer match (if this is an option). Of course, this assumes you start saving early.
Everyone is different with unique life experiences. So, what’s right for you? This is why knowing roughly how much you will spend in retirement helps you determine how much you need to save.
For starters, check out a calculator that can help determine how much you need to save each year.
Social Security
Granted, you’ll likely have social security coming in as well (although it may not be much). If you’re able to collect these benefits, it will increase your yearly amount.
Here’s a good tip: if you can delay collecting social security, the amount you receive each month will be more. But every situation is different, and if you need to take your Social Security as early as 62, do what’s best for your needs.
Did you know that pastors have the option to opt-out of social security? There’s a lot of confusion around this and many pastors regret their decision to opt out later in life. Here’s what you need to know if you opted out of social security or are thinking about opting out.
Strategies that can help boost your savings
- Start early if you can. The earlier you start, the more time your money has to grow.
- If you have a company match, take advantage of it. This is essentially “free” money.
- Can you contribute just 1% more? Every little amount counts.
- Contribute more as your salary increases.
- If you’re 50 or older, you can contribute an extra amount to your savings.
*Employees with at least 15 years of service (who are contributing to a 403(b) plan) may be eligible to put away even more. Find out what the IRS has to say about it here.
Bottom line
As you plan for retirement, remember that there will never be a single right answer to how you should save for retirement. What really matters is that you have a plan. Then review this plan regularly to adjust it as needed.
At TruthPoint, we understand that retirement planning can be confusing. If you’re looking for effective retirement plans for your organization, we’d love to chat. Give us a call or schedule a meeting today.