<strong>The Most Important Pieces of the Retirement Puzzle</strong>

No matter what you do for a living, all of us have some sort of “retirement” plan in our minds.  It might be part-time consulting in your field for a premium or it could be retiring to Lake Havasu and acting like your grandparents did, but planning is key to realizing whatever dream you have for retirement.  There are tons of resources on “how to plan” but let’s look at the hard costs involved to effectively calculate how big your nest egg needs to be.  Bear in mind, this data is over a year old, and DOESN’T reflect the spike in costs for 2022’s inflation!

According to data from the Bureau of Labor Statistics (BLS), here’s a breakdown of the biggest average annual expenses among older households:

  • Housing
    • Age 55-64: $18,006
    • Age 65-74: $15,838
  • Transportation
    • Age 55-64: $9,321
    • Age 65-74: $8,338
  • Food
    • Age 55-64: $6,800
    • Age 65-74: $6,303
  • Pensions & Social Security
    • Age 55-64: $6,578
    • Age 65-74: $2,788

  • Health care
    • Age 55-64: $4,958
    • Age 65-74: $5,956
  • Entertainment
    • Age 55-64: $2,852
    • Age 65-74: $2,988
  • Other
    • Age 55-64: $5,963
    • Age 65-74: $5,257

Though it might be intimidating at first, there are some things you can do now to get a rough estimate of what you will need in retirement — even if there are still some unknowns.

1. Take a look at your budget.

This step is possibly the most tedious, but if you get through this step, the others will be a breeze!

If you already have a budget, this part will be much easier, since you’ll be basing your future spending on your current spending.  But if you don’t yet have a budget, take your current expenses from the last month and record them, either on paper or an Excel spreadsheet.

For variable expenses, such as an electricity bill, use the average of a year’s bills — so add up all the bills, divide by 12 and use that number as your estimate.  To factor in the recent cost increases in electricity, I’d advise adding at least 15% to the total, and recognize fuel and electricity can be a tough piece to budget years in advance.  It’s a start, though!

For expenses that don’t require payment every month, such as an auto insurance premium, divide up the amount to determine approximately how much you’d be spending every month.

The great thing is, some expenses, such as a mortgage or other debts like student loans, should disappear by the time retirement hits.

2. Figure out how much you’ll spend in retirement.

In another column on the spreadsheet, write down what you think your budget will be in retirement, minus paid off debts. But be realistic — there may be fun items you’d like to create a budget for, such as travel, golf, eating out, or ballroom dance lessons.  Once you’ve added up these expenses along with your monthly bills, you’ll have an estimate you can use to plan out what you’ll need in retirement.

It’s easiest to use the so-called 80% rule, which says you should have a goal of replacing 80% of your pre-retirement income — or your average income you expect to earn 10 years before retirement.

Another great rule to use for retirement is the 4% rule, which maintains that you can safely withdraw 4% of your retirement savings each year without running out of money.

Here’s a sample calculation to put this idea into perspective.  Say you have retirement savings of $1 million, and your projected spending has been calculated to be around $3,000 a month. Using the 4% rule, you could safely withdraw $40,000 per year from your retirement account, giving you about $3,333 per month to live on.  Since you may also receive other supplemental retirement income such as Social Security or pension payments, you’d be well above the $3,000 per month needed to fund your retirement.

3. Find out if you’re on track.

But, how can you know if you’re on track now for retirement?  If you want to figure out if you’re on track now for having the right amount in your retirement account no matter your age, there are several simple ways to get a good idea.

Consider the benchmarks

Many investment firms and financial institutions have done research to determine how much to have saved at a particular age, depending on spending and income.

The JPMorgan Asset Management Team reports that someone age 40 with an annual household income of $100,000 should have 2.6 times that amount put away for retirement, and by age 60, that multiple should be 7.3.

If you’re not there, understand that there are multiple ways to get there, not just in a 401(k).  Roth IRAs, traditional IRAs, and even Whole Life Insurance policies can all pay out the types of cash you’ll likely need after retirement.  Can my team help you with that?  Not specifically, but we can help you to craft a strategy that puts more money in your pocket to be able to invest. 

Give us a call and let’s keep you on track!


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