The answer to this question is very personal. First, you need to decide what your goals are for retirement. What do you want to do? If you want to travel, you may need more money than if you want to putter around the garden. Your lifestyle in retirement will determine, in large part, your retirement income needs. Many decisions, such as where you want to live and how much money you want to spend on your children, will factor into customizing a financial plan. Spending the time to really think about these factors is the key to developing the amount of money from savings, pensions, rentals, social security benefits and other sources of income that it will take to make your retirement all that you desire.
Experts cite varying “rules of thumb” for estimating how much money people will need to retire. Some say you need a million dollars and two million if you are part of a couple. Other experts estimate that you will need 10 to 12 times your working annual salary in savings. Still others advise you to have an annual income from 70 to 80 % of the amount you earned while employed.
How can you arrive at a less “general” estimate of what you will need? Think about what costs may decrease and which may increase when you retire. More Americans say that their health played a larger role in deciding when they retired than financial considerations according to a National Institute of Aging report.
Medical bills and supplemental insurance (for the costs Medicare does not cover) may increase your monthly bills, if you had insurance paid by an employer before you retired. Others may pay less each month if they paid for their own health insurance when they worked. Generally, healthcare costs increase as we age, so consider your insurance needs and other options in your planning. Add up all your monthly bills now including taxes, insurances, transportation, housing, food, vacations, etc. to come up with a baseline budget.
What costs may decrease if you retire? Perhaps you want to downsize your living space or move to a less expensive location. When you are no longer employed, you won’t be paying payroll taxes, commuting expenses, and your clothing budget may decrease. You may be able to lower your cost of living by 30 to 50%. Your customized lifestyle plan will help you estimate and control costs. Once you have an estimated retirement budget, subtract your social security benefits, pensions, and other sources of income.
Most of us will have an income gap that we will need to fill with savings. The average American, retiring at 62 years, lives to be 78.7 years old. Life expectancy is increasing and people are retiring much later. If you were born after 1960, your full Social Security retirement benefits begin at 67.
As of 2015, if you take Social Security benefits before your full retirement age, your benefit will be decreased by 5/9 of 1% for each month of early retirement up to 36 months and a 5/12 of 1% decrease over 36 months. On the other hand, if you wait until after your full retirement age, your benefits can increase to 30% up to age 70. There is no benefit after age 70. For more information, visit the Social Security website. Of course, your personal health will influence when you want to start taking benefits.
Whether you use internet sources (and there are many) or hire a professional to guide you, communicating your lifestyle plan for retirement will help you make decisions about when to retire, how much income you’ll require and how to achieve the retirement that is unique and fulfilling to you.