Retirement Planning Series, Part III
In our previous newsletter, we continued the Retirement Planning section of our financial literacy series by discussing Individual Retirement Accounts, or IRAs. Today, we will delve into the topic of how to estimate your retirement expenses and budget. While there are general rules of thumb, each person’s financial life is unique, and today we will provide some tips on how to evaluate your own financial situation to create a realistic retirement budget.
One of the most common rules of thumb regarding retirement saving is to save 10x your pre-retirement income. For example, if you are 67 and making $50,000 per year, this general rule of thumb would suggest that you would need $500,000 to retire. In addition, this rule of thumb typically comes along with benchmarks for investors: 1x your salary by age 30, 3x your salary by age 40, 6x your salary by age 50, and 8x your salary by age 60. However, this may be an ambitious goal for investors, so while this strategy may provide a general outline for retirement saving, there are other factors that you may need to consider that can alter this retirement goal.
When you think of retirement, you may imagine yourself traveling the world and sipping a tropical drink. However, most experts don’t believe that retirement is that static. In fact, one way to view retirement is through its three major stages: the Go-Go years, the Slow-Go years, and the No-Go years. The Go-Go years, known as the initial years in retirement, are typically what you envision when you think about retirement. The Go-Go years generally include relatively good health and the energy to check off bucket list items such as global travel or enjoying your favorite activities. The Slow-Go years are when your body and mind begin to slow down; you can still garden, but travel may seem too exhausting. Finally, the No-Go years are when your mind and body officially slow down, and most tasks have become notably more difficult to accomplish.
These three periods illustrate how retirement expenses may be front-loaded for a majority of retirees. While there could be significant medical expenses during the later years, most retirees will generally do most of their discretionary spending during their Go-Go years. The Bureau of Labor Statistic’s 2021-22 Consumer Expenditure Survey illustrates this phenomenon; the average annual expenditure by individuals age 65-74 is $58,715, whereas the average annual expenditure by individuals 75 and older is $49,786. By having an idea of what bucket list items you would like to accomplish during your Go-Go years, it can give you a more realistic idea of what amount of
discretionary income you’d like to have available at the very start of your retirement.
Another important aspect to consider is your current expenses. Reviewing your current budget can provide a guideline for your retirement expense estimates. When looking at your current budget, ask yourself this question about each expense: is this something that I will have to pay in retirement? For example, while you may have a mortgage or a student loan currently, it may be on schedule to be paid off by the time your retirement date arrives; in that case, you can disre-gard that expense. Another example is review your grocery budget. If you still have children at home, you may be cutting your grocery bill down from feeding four people to feeding two while in retirement. On the flip side, it may be worth it to overestimate any current healthcare or medical expenses, as increased medical costs and issues as we age are commonplace. By reviewing your current budget, you can have a more realistic expectation for your retirement expenses.
A final piece of the puzzle to consider is your Social Security income. While it is our hope that your retirement income will be mostly from your 401(k), IRA, or other investments, we recognize that Social Security plays pivotal role in retirement income. If you are unaware of what Social Security income you are on track for in retirement, you can make a free online account at ssa.gov. On this website, you can find four numbers: what you would qualify for today if you were to become disabled, your income at early retirement at age 62, your income at full retirement at age 67, and your income at delayed retirement at age 70. Your Social Security income is calculated by your top 35 highest-earning years, so the number may continue to increase if you are currently at your peak career earnings. By knowing what you can expect to receive in Social Security income, you can better estimate any potential retirement income gaps.
Knowing what to save for retirement can be a complicated process, with most of the issues caused by the unforeseen; inflation, potential health issues, major life crises, and retirement savings fluctuations can all add to the stress. However, by following these tips, you can have at least a general, personalized outline for what you will need in retirement to live the lifestyle that you would like to achieve.
ment at age 67, and your income at delayed retirement at age 70. Your Social Security income is
calculated by your top 35 highest-earning years, so the number may continue to increase if you
are currently at your peak career earnings. By knowing what you can expect to receive in Social
Security income, you can better estimate any potential retirement income gaps.
Knowing what to save for retirement can be a complicated process, with most of the issues
caused by the unforeseen; inflation, potential health issues, major life crises, and retirement
savings fluctuations can all add to the stress. However, by following these tips, you can have at
least a general, personalized outline for what you will need in retirement to live the lifestyle that
you would like to achieve.
