No matter what you do for a living, all of us have some sort of “retirement” plan in our minds. It might be part-time consulting in your field for a premium or it could be retiring to Lake Havasu and acting like your grandparents did, but planning is key to realizing whatever dream you have for retirement. There are tons of resources on how to plan that, but let’s look at the hard costs involved and how you might be able to effectively calculate how big your nest egg needs to be.
According to data from the Bureau of Labor Statistics (BLS), here’s a breakdown of the biggest average annual expenses among older households.
Housing
- Age 55-64: $18,006
- Age 65-74: $15,838
Transportation
- Age 55-64: $9,321
- Age 65-74: $8,338
Food
- Age 55-64: $6,800
- Age 65-74: $6,303
Pensions & Social Security
- Age 55-64: $6,578
- Age 65-74: $2,788
Health care
- Age 55-64: $4,958
- Age 65-74: $5,956
Entertainment
- Age 55-64: $2,852
- Age 65-74: $2,988
Other
- Age 55-64: $5,963
- Age 65-74: $5,257
Here are some simple steps you can take to make sure you are on the right track — or at least identify what changes you might need to make — in order to ensure that you are adequately prepared for retirement.
Though it might be intimidating at first, there are some things you can do now to get a rough estimate of what you will need in retirement — even if there are still some unknowns.
1. Take a look at your budget.
This step is possibly the most tedious, but if you get through this step, the others will be a breeze!
If you already have a budget, this part will be much easier, since you’ll be basing your future spending on your current spending. But if you don’t yet have a budget, take your current expenses from the last month and record them, either on paper or an Excel spreadsheet.
For variable expenses, such as an electricity bill, use the average of a year’s bills — so add up all the bills, divide by 12 and use that number as your estimate.
For expenses that don’t require payment every month, such as an auto insurance premium, divide up the amount to determine approximately how much you’d be spending every month.
The great thing is, some expenses, such as a mortgage or other debts like student loans, should disappear by the time retirement hits. (If you really want to maximize your retirement savings, check out this guide to pay off your debts as quickly as possible — then take the money you were using to pay debt and put it directly into your saving for retirement!).
2. Figure out how much you’ll spend in retirement.
In another column on the spreadsheet, write down what you think your budget will be in retirement, minus paid off debts. But be realistic — there may be fun items you’d like to create a budget for, such as travel, golf, eating out, or ballroom dance lessons. Once you’ve added up these expenses along with your monthly bills, you’ll have an estimate you can use to plan out what you’ll need in retirement.
But, that’s not all — you’ll also need to use something called projected spending to calculate your estimated spending in retirement.
How projected spending works
Projected spending multiplies your current income by a certain percentage to determine how much you’d need in retirement. Though this method is not completely accurate, it does give you a good estimate to begin with when you start thinking about your retirement. Most often, the 80% rule is used, which says you should have a goal of replacing 80% of your pre-retirement income — or your average income you expect to earn 10 years before retirement.
If you’d rather be on the more conservative side when it comes to spending, use the 90% rule — or, if you think you’ll definitely spend much less in retirement, calculate 70% of your pre-retirement income. Adding in social security can move the percentage down more. But keep in mind — this number is just an estimate to get you started.
The 4% rule. Once you’re in retirement and you’ve got a bunch of money stashed away, you’ll want to keep something in mind: The 4% rule. The 4% rule maintains that you can safely withdraw 4% of your retirement savings each year without running out of money.
Here’s a sample calculation to put this idea into perspective. Say you have retirement savings of $1 million, and your projected spending has been calculated to be around $3,000 a month. Using the 4% rule, you could safely withdraw $40,000 per year from your retirement account, giving you about $3,333 per month to live on. Since you may also receive other supplemental retirement income such as Social Security or pension payments, you’d be well above the $3,000 per month needed to fund your retirement.
3. Find out if you’re on track.
But, how can you know if you’re on track now for retirement? If you want to figure out if you’re on track now for having the right amount in your retirement account no matter your age, there are several simple ways to get a good idea.
Consider the benchmarks
Many investment firms and financial institutions have done research to determine how much to have saved at a particular age, depending on spending and income.
JPMorgan Asset Management Team reports that someone age 40 with an annual household income of $100,000 should have 2.6 times that amount put away for retirement, and by age 60, that multiple should be 7.3.
If you’re not there, understand that there are multiple ways to get there, not just in a 401(k). Roth IRAs, traditional IRAs, and even Whole Life Insurance policies can all pay out the types of cash you’ll likely need after retirement. Can my team help you with that? Not specifically, but we can help you to craft a strategy that puts more money in your pocket to be able to invest.
Give us a call and let’s keep you on track!
If you or your clients have any tax issues or problems with the IRS/State or other federal tax problems, please feel free to contact me directly at (909) 570-1103 or by email at Carlos@HealthcareTaxadvisor.com
Carlos Samaniego, EA
Enrolled Agent
Licensed by The Department of Treasury to represent taxpayers
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Redlands, CA 92374
Ph. (909)570-1103
Fax (909)586-9190
