If you're like most people, you probably think more about how you want to spend your retirement than you do actually planning for it. However, while planning for retirement isn't nearly as enjoyable as thinking about all the adventures you have to look forward to, it is crucial if you want to be able to afford those adventures.
Retirement comes with a hefty price tag, and it's only getting more expensive. The average American age 65 and older spends roughly $46,000 per year, according to the Bureau of Labor Statistics. So if you spend, say, 20 years in retirement, that's a grand total of $920,000 you'll need to last the rest of your life -- and that doesn't even account for inflation over the years.
However, the average person doesn't have nearly enough saved for retirement, making it all the more likely that they'll run out of savings before the end of their life. In fact, between 42% and 60% of U.S. households are at risk of not having enough money to make ends meet during retirement -- even if they cut their spending back to just 75% of preretirement levels -- according to a 2018 study from the Center for Retirement Research.
So what does that mean for you? It means if you want to be able to enjoy the retirement you've been dreaming of, you'll probably need to save more than you think.
Determining how much you'll need for retirement
There's no simple way to know exactly how much you'll need to have saved for retirement, and everyone's retirement number will be different. Some people may be able to live comfortably with a nest egg of $500,000, while others may need three times that much just to make ends meet.
One oft-cited guideline is the "Rule of 25," which states that you multiply your total annual expenses by 25 to calculate how much you'll need to have saved by the time you retire. So if you plan to spend $50,000 per year in retirement, multiply that by 25 to find that you'll need $1.25 million saved. The theory behind this guideline is that you'll be able to withdraw that annual amount (or $50,000 in this scenario) during the first year of retirement and then adjust it each subsequent year based on inflation, and your savings should last several decades.
That being said, the Rule of 25 isn't always accurate, and there are plenty of other factors to consider when planning for retirement. For example, will you have any other sources of income during retirement, like Social Security benefits or a pension? While you shouldn't rely solely on those income sources, they can make your savings goal a little more attainable. If, for instance, you expect to spend $50,000 per year in retirement but know you'll be getting $25,000 from other income sources, you now have a savings goal of $625,000 by the time you retire, according to the Rule of 25.
Also, the Rule of 25 doesn't necessarily consider the type of lifestyle you expect to live during retirement or other costs that may pop up. You may need $50,000 per year now to make ends meet, but you could end up spending less than that during retirement once you no longer need to commute, buy lunch at work, or dry clean your clothes every week. Or if you expect to spend a lot of money traveling or trying out new hobbies, you may spend more during retirement than you did when you were still working. And you'll also likely face more healthcare expenses as you age, so the amount you're spending each year will fluctuate throughout retirement.
So how do you come up with an accurate estimate of how much you'll need in retirement? There's no single right way to do it, but one smart way to start is by using a retirement calculator. Some calculators will let you include a variety of factors such as other income sources, inflation rates, as well as your spouse's income, so you'll get a more accurate idea of what you need to aim for. Plug in all your numbers, and you'll get a ballpark idea of how much you'll need. Also, because each calculator is slightly different, be sure to try several different ones to get a range of answers.
Simple ways to save more
Once you have a goal in mind, the next step is to start saving more to reach that goal. Of course, the best way to save more is to simply cut back in other areas so you can put more toward retirement. That's easier said than done, though, and it can be tough to find ways to cut back if you're already feeling strapped for cash.
The best place to start is with a detailed and comprehensive budget. Map out every expense you have, then see if there are any places you can trim or eliminate completely. For example, if you currently eat out once a week, try scaling back to just once every other week. If you save $50 per month, that amounts to $600 after a year. Make several small changes like that, and you could be saving a couple thousand dollars per year.
Of course, you'll need to make more significant changes to your financial habits if you're already behind on your saving. If you need $1 million by retirement age and you're already in your 30s or 40s, an extra $1,000 per year won't get you too far. In these situations, you'll need to make more drastic changes if you want to be able to afford retirement.
In some cases, even big changes may not be enough. If you're, say, in your 50s and don't have a penny saved for retirement, you can cut back everywhere possible, and you still may not be able to save hundreds of thousands of dollars by your mid-60s. However, that doesn't mean all hope is lost. You may need to work awhile longer than you had anticipated, but that has its advantages too -- not only does it give you more time to save, but if you delay claiming Social Security benefits, you'll also receive fatter checks. You may also have to learn to live on less during retirement if you can't afford lavish vacations or expensive new hobbies, but there's nothing wrong with living a simpler lifestyle and taking time to relax.
In short, you should always be doing what you can to stash some savings for the future. The earlier you have a goal in mind, the earlier you can start working to achieve that goal.
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