The ultimate question: how much money do I need to retire?
Truthfully, it depends. But financial experts often recommend replacing 80% of your pre-retirement income to maintain the same lifestyle after retirement. If you earn $200,000 per year, your ideal retirement income would be $160,000.
However, like most financial matters, there are several factors to consider when deciding how much you need to retire comfortably.
What Does Your Ideal Retirement Look Like?
Your lifestyle goals directly impact your retirement spending needs. First things first, you need to decide where you want to live.
Do you want to stay in your same home or downsize to an apartment or condo? Maybe you’d like to move closer to home or buy an RV and live the life of a nomad. If good weather is essential, consider settling in St. Louis! Whatever you choose will have drastic impacts on your income needs.
You’ll also need to consider how you’ll spend your time. Will you become a golf course regular, or do you plan on traveling around the world? Or perhaps you want to spend more time with your grandchildren or pick up a new hobby. Think about what will make you feel happy and fulfilled.
Healthcare is often the most significant expense retirees need to prepare for. The average 65-year-old couple can expect to spend an average of $315,000 in healthcare expenses during retirement. That’s a significant chunk of change! Consider your current and future healthcare needs and increase your contributions to tax-advantaged accounts today (if needed) to ensure you have more tax-free dollars to spend on healthcare in retirement.
Calculating Your Current Expenses
Unfortunately, bills and expenses don’t come to a halt in retirement. Calculating your current expenses today will give you a clearer idea of the steps you need to take to reach your retirement goals. You’ll need to take several items into account, including:
- Insurance premiums
- Car payment
- Credit card payments
- Healthcare Expenses
- Property taxes
- Personal Spending
This is a partial list but includes most of the significant standard expenses. How do you think these expenses change based on your ideal retirement needs? That number is unique to you.
What Do Your Savings Look Like?
Look at your retirement savings accounts today despite the market being in disarray. As you go through your accounts, ask yourself:
- Am I maximizing my IRA and 401k contributions? Whether your business has a SEP IRA, SIMPLE IRA, or 401(k) plan, aim to max out your accounts annually.
- Am I contributing to an HSA? If you have an HSA and anticipate more healthcare expenses in retirement, it’s a good idea to contribute extra funds if you’re able.
- Are my investments performing as I anticipated? You may need to make some changes based on your risk tolerance, timeline toward retirement, and long-term goals.
- Do I have a fixed income I can rely on in retirement? This can include pension plans, Social Security, and annuities.
A 360-degree view of your savings will allow you and your financial advisor to create a financial plan that meets your retirement goals.
Where Will Your Income Be Coming From?
Now that you have a deeper understanding of your expenses and savings, you must know if your retirement income can cover everything. Sources of retirement income come from:
- Social Security: Social Security is a crucial income source for many retirees. The age you apply for benefits is critical—experts suggest waiting until full retirement age to receive full benefits.
- Pension: If you have a defined benefit pension, you will know how much pension income you’re entitled to before you retire. Pension is based on how long you’ve worked at your company, your earnings, and what age you stopped working.
- Retirement account withdrawals: This includes 401(k) and IRA accounts. After decades of contributing to these accounts, you’ll finally be able to reap the rewards in retirement.
- Part-time work: Working part-time is vital to many retirees. It’s a great way to supplement retirement income streams if you have a passion project to pursue or simply want to remain active in the workforce.
What Needs to Change?
If your finances are not on track for retirement, take a deep breath, relax, and work with your financial advisor to devise a plan of action.
Debt is one of the most common factors that hold people back from reaching their retirement goals. If you have any debt, such as student loans or credit card debt, actively work towards paying it off. The faster you can pay off high-interest debt, the better.
If you’re not maxing out your retirement accounts, it’s time to contribute more. Even if you can’t max out, contributing just 1-3% more will make a difference.
Sometimes personal spending can get in the way of retirement savings goals. There are simple ways to save money that don’t significantly affect your life, like going out to eat one less per week, skipping the weekend getaway, or cutting down on unnecessary shopping or spending.
The Best Plan is to Plan Ahead
Planning for retirement can be intimidating and complicated, and you shouldn’t have to do it alone. Work with your trusted financial advisor to determine your ideal retirement lifestyle and create a savings plan that fits your lifestyle and helps you meet your goals. Toberman Wealth will help you create a retirement savings plan to reach your retirement goals because you deserve the most rewarding golden years possible. It’s your retirement—make it count! Get in touch to learn more.
Craig Toberman is the Founder of Toberman Wealth – a fee-only, fiduciary financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.