How Much Do You Really Need in Retirement?

The American College of Financial Services
December 1, 2020

Predicting how much money you’ll need in retirement is an inexact science at best. If you’re in your 30s, you are being asked to project 40 to 50 years in the future. Even if you’re close to retirement age, you still need to make a few decades’ worth of calculations. 

To paraphrase the immortal Yogi Berra, “It’s tough to make predictions, especially about the future.” 

Investing in your retirement requires you to not only predict the future but to make financial decisions based on those predictions. How can you make the most informed decisions about your long-term financial needs, regardless of your age or when you plan to retire?

One common way is to use free online retirement calculator tools. Unfortunately, some of these tools are hosted by financial investment firms looking to promote their services. If you prefer to avoid that, use calculators provided by organizations like AARP. But even the best calculators have their drawbacks because, despite being a good way to get you thinking about what you need — and what you might need to do differently now to get there — they’re based on general data and the law of averages, not on you.

To get a better sense of your retirement, go beyond the numbers and get to the fundamentals.

Focus on the constants

You may not know everything about what you’ll need in retirement, but you’ll need to cover the basics, so start there.

  • Housing. Here’s where knowing your preferences can help you get more specific with your projections. If you’re a homeowner who plans to age in place, will your mortgage be paid off when you retire? If so, that’s great; just remember to account for ongoing maintenance, insurance costs, and property taxes. Consider modifying your home as necessary now while you have a regular income, or downsizing to a more manageable — and less expensive — house.

Retirement communities are another option. Choices range from individual apartment living to 24/7 care in a skilled nursing setting, and costs vary just as widely. If this is your picture of retirement, price options in your desired location. In a best-case scenario, the money you get from selling your home can cover a significant portion of your future housing costs.

  • Healthcare. According to the Employee Benefit Research Institute, health spending constitutes 8% of expenses for those aged 50 to 64, a figure that rises to 11% for those over 75. It’s essential to account for that increased spending. If you’re currently enrolled in a plan through work, find out what happens when you retire. You may have options to continue with the group plan, or you may have worked at your job long enough to become vested in certain benefits.

All Americans are eligible for Medicare when they turn 65. Unless you’re getting Social Security, you need to enroll at that age. Medicare will cover about half of your healthcare costs. You’ll need to supplement the plan with private coverage or with the public Part C or Part D. Research the program at medicare.gov and explore the available options and costs

Factor in geography

Certain parts of the country will be more expensive retirement destinations than others. You’ll need more money to retire in San Francisco than you will in Duluth. 

There are factors to consider beyond the obvious cost-of-living items like housing. For example, some states tax Social Security benefits. Check out property taxes and see if any programs exist for homeowners over 65. If you have a sizable estate, be aware that six states currently collect an inheritance tax and 12 collect estate taxes. Because some exemptions apply, it’s worth researching your intended location to learn how these costs could impact you and your family. 

Play the percentages

Let’s face it: One of the reasons retirement planning is difficult to talk about is because it forces us to think about the other inevitable thing in life besides taxes. But having a reasonable sense of your life expectancy can help you avoid the two major retirement nightmares — running out of money or cutting corners unnecessarily. 

The good news is that people who reach retirement age can expect to live longer. According to the Social Security Administration, men and women who reach age 65 live to ages 84 and 86.5, respectively. With one in three 65-year-olds living past 90 — and one in seven past 95 — a third of your life could be in retirement. 

Balance those odds with your personal health and family history. If you’re married, talk with your spouse about their expectations. If you or your spouse are dealing with an ongoing medical condition, you may want to include long-term care insurance in your retirement plan.

The good news is, you don’t have to do all this planning alone. Consider talking with a financial advisor who has expertise in retirement planning. After all, these are meant to be your golden years, and you’ve worked hard to make them that way.  

 


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