Retirement Ready? What's Enough?
How much do you really need to retire? To many, it feels like an elusive number. Determining a goal to work toward is doable, but there are several variables and factors to consider.
The best way to tackle this is to discuss it with a financial planner so they can give you specific guidance for your specific needs, but we wanted to give everyone an idea of what needs to be considered.
Traditionally, you may have heard “rule of 25” and the 4% rule when approaching retirement.
So what does that mean? The “rule of 25” is suggesting that your goal should be saving 25 times your annual expenses before retiring. For example, if you spend $40,000 a year, you’d want a nest egg of $1 million.
The 4% rule is a companion to that plan, with the idea being that you can safely withdraw 4% of your retirement savings each year without running out of money. This is based on historical data of stock and bond returns over 30 years of retirement.
Retirement is like most finances in that it’s not a one-size-fits all plan. The landscape of retirement is changing just like life is changing and we have to remember that these rules are a great place to start but they don’t cover everything like market fluctuations, healthcare costs, and of course, longer lifespans.
Lifestyle choices also have to be considered. Many people now have more active retirements that might require more funding upfront. For example, if you plan to travel, those costs need to factored in, especially if you will still maintain your home as well. Your costs will increase for travel.
Where you live can be a factor to consider as well. Basic costs of living can fluctuate wildly geographically. Urban areas can be higher than perhaps living in the country or even a smaller town.
And we can’t forget about unexpected expenses like big home or auto repairs. Major illnesses can also increase healthcare costs.
And recently, inflation has become a big part of the variable. Many that may have planned for the 25 rule probably didn’t expect the jumps in the cost of just about everything. Not just basic needs either, but healthcare, repairs, you name it, it’s gone up. This may be the number one thing people over look when planning.
Needing assisted living or a similar environment will most likely come at a higher cost than your current home. Therefore, this cost increase should be considered.
It is recommended that you start with calculating your current expenses and then adjusting for inflation and those lifestyle changes we discussed.
Tools like retirement calculators can help simulate scenarios based on your savings, expected returns, and withdrawal rates.
This is truly where a financial advisor can be so important. They can look at your circumstances and your income, your goals and put it all together and help you see a better picture.
Consider also looking at ways you can diversify your income sources in retirement as you may need to go beyond just be relying on your retirement accounts. Social Security will most likely be available as well as any pensions or other investments you have. For some, it may even be worth considering part time work.
As you can see, there are many factors at play such as your personal circumstances, market conditions, and even your definition of retirement. So, there is not an easy answer, but with a little planning and a little help you can create a solid plan for your retirement.
BONUS
Just like with your finances now, and other things in life, it’s important to embrace flexibility when it comes to your retirement spending. The plan is crucial, this is true but it’s really important to be adaptable.
Typically, retirees will spend more in the early years of their retirement. They tend to travel and just enjoy their new found freedom! But often in later years that spending my decrease a bit. Again, this depends on the person and their lifestyle. But being prepared for variable spending each year can be helpful.
You can also consider keeping some of your portfolio invested in growth-oriented assets. This can help you maintain some flexibility with your withdrawal rates depending on how your investments are performing. And of course, a flexible strategy helps with unexpected costs happen or your circumstances change, or like we experiencing now, with the economy changes.
That flexibility can come in things like adjusting spending or finding ways to adjust income where you can. It’s actually a very similar thought process as you do before retirement.
It’s all about having a plan but being able to adapt.
Visit a financial planner to get help making sense of it all and help breaking down these variables and making the best decision you can. The key is to realistically look at your needs and your goals and then work to plan a strategy that works for you. Because The GOAL is to enjoy your retirement without financial stress. Planning for adaptability can really make a difference.