How Much Money Will You Need to Retire?

Wondering how much money you’ll need to retire is practically a national pastime now, as many Baby Boomers approach retirement age with investments and home values that may not have recovered from the 2008 recession. Adding to our collective anxiety is varied advice in the media about how much to save before you leave the workforce. Do you need $1 million? Maybe $2 million? What about the 41% of Americans who haven’t saved anything for retirement — what should they do?

The real answer is “it depends” – on your lifestyle, life expectancy, healthcare needs, and other unique-to-you factors. Here are some things to consider while you plan how much you – not Joe or Jane average – need to set aside for your post-work years.

Think about your post-retirement expenses

A lot of general recommendations assume your expenses will remain high after you retire – about 80% of what you spend during your peak earning years. Those are usually also the years when people have mortgage, car, and student-loan payments and are raising kids, paying for their college, and possibly helping cover the cost of care for their aging parents, too. Ideally, you won’t have those debts and expenses in your 70s and later. You may be able to spend less and enjoy a comfortable lifestyle.

However, AARP points out that some experts say you should save as if your spending won’t drop at all, especially if you intend to catch up on travel, remodel your home, or pursue a costly hobby once you’re free to do so. On the other hand, US News & World Report says retirees can reduce their post-retirement cost of living by as much as 50% and do just fine. Again, it depends on what you plan to do after you retire.

To get a rough idea of how much you’ll need, set aside some quality time with a calculator and your bank statements. Which of your current expenses will continue after retirement and which will stop when you stop working? Look at your monthly, quarterly, and annual expenses for the clearest picture of what you’ll need. If there will be new expenses, add them in, too.

Stretch your savings with long-term care coverage

Life expectancy in the US is outpacing traditional retirement planning parameters. Many 65-year olds today can expect to live well into their 90s. Related to that increase in life expectancy is the prospect of health care expenses over a longer period of time.  Because long-term care like assisted living and nursing home living costs several thousand dollars a month and isn’t covered by Medicare, your retirement plan should include the purchase of long-term care insurance. It will cover expenses that Medicare won’t so your savings can last longer.

The bottom line

You can’t predict everything life will throw at you, but you can follow a few simple principles to prepare for retirement.

• Save whatever you can. Most financial experts recommend setting aside 10% to 15% of your income for retirement. If you can save more, do it. If you must save less, don’t give up.
• Buy a long-term care insurance policy and keep it current.
• Estimate your post-retirement expenses and see if you can cut them without suffering.

Finally, consider talking with a certified financial planner about your retirement. He or she can analyze your current assets, debts, and lifestyle goals to help develop a customized plan for you to follow.

Casey Kelly-Barton

Casey Kelly-Barton is an Austin-based freelance writer whose childhood was made awesome by her grandmothers, great-grandmother, great-aunts and -uncles, and their friends.