How much money will it take for you to thrive in retirement?
Unfortunately, the majority of Americans can’t pinpoint exactly how much they’ll need to live comfortably for the extent of their golden years. In a recent report by Merrill Edge, they found that “many Americans are unable to articulate their ‘magic number,’ and more than half of respondents didn’t think they’ll need more than $1 million.”
But most retirees are nowhere near the $1 million mark.
Studies show that one out of every three Americans has absolutely nothing saved for retirement, 56% have less than $10,000 saved, and just 18% have $200,000 or more in retirement savings. The average 50-year-old has only around $60,000 saved.
Is this enough to truly live off of? What happens if you live longer than expected? What happens if Social Security doesn’t pay out? How can you calculate your “magic number?”
If you’re not sure how to calculate your retirement income, or you’re worried about what you have saved (or not saved) for retirement thus far, here’s what you need to know.
The first step to determining your overall quality of life in retirement is to figure out how much money you’ll be spending each year on average. You’ll most likely want to start with your current expenses and then add any extra variables you might experience in retirement.
You will want to calculate:
- Your current take-home pay (what gets deposited after all deductions)
- Any expenses that come out of your current paycheck that you would also have to pay out-of-pocket after retirement (health insurance, mortgage, etc.)
- Any extra expenses you might incur after retirement (additional healthcare needs, etc.)
- Any taxes that must be paid on retirement income (if applicable)
- Any extra expenses for any desired lifestyle changes (you want to travel more in retirement, or take up a new hobby, for example)
- Any extra expenses associated with big purchases that will need to be made in the next 10-20 years (major home repairs, housing changes, etc.)
- Minus any expenses that will decrease in retirement (gas money for long work commutes, etc.)
- Minus your contributions INTO retirement accounts, once you retire you no longer need to keep saving!
If your final number is positive and you’re either at or over budget, that’s a good sign, though you’ll need to make at least your current level of income (pre-retirement) in order to sustain you every year after retirement. If the number is negative, however, you will need to make significantly more in retirement than you do now, or cut down on your living expenses (or both). We’ve found most of our clients spend a very similar amount of money in retirement as they did in their years leading up to it.
Once you have a more accurate idea of how much you will need to sustain you each year post-retirement, you will then have to calculate how many years you plan on living, which of course is the hardest part.
Length of Retirement
It’s not necessarily complicated to predict how much money you will need for bills each year, as you most likely already have a monthly or annual budget you follow closely. The real trick to determining your retirement costs is knowing how many years that income has to last.
If you live longer than you estimated, you risk spending down your savings or relying solely on Social Security. According to the SSA’s life expectancy calculator, the average 65-year-old man (born on January 1, 1951) has a life expectancy of 84.4 years, and the average woman 86.7.
But there are several other factors that can determine your lifespan, including:
- Your current health and any genetic or hereditary health conditions that may affect you in later years
- Activity levels in retirement (the risk of injury rises with activity levels, especially if you have been relatively sedentary before retirement)
- Behavior changes associated with a new lifestyle (travel, dietary changes, etc.)
You want to make sure you don’t outlive your money, so it’s better to overestimate the amount of time you will live during retirement than to underestimate.
Your ultimate goal should be to prepare for a long (and happy) life and make contingency plans to leave a legacy should you pass away sooner than expected.
Sources of Income
Of course, if by now you realize that the total amount you will need to live on each year multiplied by the full extent of your life is more money than you have saved up, you may be panicking.
As is the case for many retirees, the amount of income you will need after retirement may exceed what your current nest egg is able to produce. If this is the case, you may also need to calculate other potential sources of income.
The first thing you will want to look at is your expected Social Security income. As of November 2016, the average Social Security check was $1,355 per month, which roughly translates into a little over $16,00 per year. While this will be a portion of your year income, it is by no means guaranteed, and it’s certainly not something you would want to live off of alone.
So what other options are there for generating retirement income?
You do have the option to continue working even after retirement. Surveys show that 75% of Americans plan to work during retirement, with 62% stating that they had financial motivation to do so.
These jobs could include something fun, like babysitting, crafting or gardening, but you always run the risk of not generating enough consistent income unless you find more sustainable part-time work.
If working doesn’t fit into your image of a perfect retirement, however, another option is to generate income through your portfolio. Cash flow investing, for example, allows you to live off the proceeds of your investments, generating paychecks that can last throughout your retirement.
In fact, the primary goal of the Snider Investment Method is to convert your retirement portfolio into cash flow so that when you are no longer able or no longer desire to work you will have the cash flow needed to replace your regular income.
This can be a particularly good option for retirees that already have a nest egg and plan to use Social Security funds, because it will allow you to do more with your money than just survive.
Calculating retirement costs isn’t always easy, but it’s usually best to err on the side of caution. Start by creating a budget based on your current expenses, and then estimate any additional costs you might face post-retirement (and yes, it will be an estimate, but do your best).
You will also want to include any “dream funds” you may have that would go toward retirement activities like travel, purchasing a new home, or adding hobbies to your life.
Multiply your annual budget by a generous amount of time spent in retirement (plan for a long life!) and that will be how much you need to retire. Estimate any income you might receive from Social Security, and what’s left will be the income you need to make.
If you don’t plan to work during retirement, and you know your Social Security won’t cover all your expenses (or that dream vacation), consider becoming a cash flow investor and maximizing your retirement income so that you can live the life you want after you hang up your hat.