Retirement Savings: Getting a General Idea of Your Target Number

Thinking about retirement and how much money you’ll need can feel overwhelming, but it’s a really important question to start considering, even if retirement feels far away. The truth is, there’s no single magic number that applies to everyone. Your retirement needs will be unique to you and your lifestyle. However, we can explore some general ideas and rules of thumb to give you a helpful starting point.

First, it’s crucial to understand that retirement planning isn’t about hitting a specific dollar amount in a vacuum. It’s about ensuring you have enough income to cover your expenses and maintain a comfortable lifestyle once you stop working full-time. So, instead of focusing solely on a big number, think about what your life in retirement might look like. Do you envision traveling the world, pursuing hobbies, spending more time with family, or simply enjoying a more relaxed pace of life? Your envisioned lifestyle will significantly influence your financial needs.

A common starting point is the 70-80% rule. This rule suggests that you’ll likely need around 70% to 80% of your pre-retirement income to maintain your current standard of living in retirement. Why not 100%? The idea is that some expenses might decrease in retirement. For example, you may no longer have commuting costs, work-related clothing expenses, or potentially even mortgage payments if you plan to have your home paid off by retirement. Also, you might be saving less for retirement itself since you’re no longer in your working years.

However, this 70-80% rule is just a general guideline and may not be accurate for everyone. Several factors can significantly impact your actual retirement needs.

Healthcare Costs: Healthcare expenses often increase as people age. You need to factor in potential medical bills, insurance premiums, and long-term care considerations. These costs can be substantial and may require a larger percentage than the 70-80% rule suggests.

Lifestyle Choices: Your desired lifestyle will heavily influence your retirement expenses. If you plan to travel extensively, engage in expensive hobbies, or maintain a larger home, your expenses will likely be higher. Conversely, a simpler lifestyle with less travel and fewer expensive hobbies might require less.

Inflation: The cost of goods and services increases over time due to inflation. You need to account for inflation when estimating your retirement needs, especially if you are many years away from retirement. What costs $100 today will cost significantly more in 20 or 30 years.

Longevity: People are living longer than ever before. A longer lifespan means you’ll need your retirement savings to last for a longer period. Underestimating your lifespan can lead to running out of money in your later years.

Unexpected Expenses: Life is unpredictable. Unexpected medical bills, home repairs, or family emergencies can arise in retirement, just as they can at any other time. Having a financial cushion for these unforeseen events is crucial.

So, how do you get a more personalized idea of your retirement needs? A good starting point is to estimate your current annual expenses. Then, think about how these expenses might change in retirement. Will some go down? Will others go up? Consider the factors mentioned above.

Once you have a rough estimate of your annual retirement expenses, you can start thinking about how to fund them. Retirement income typically comes from a combination of sources, including:

• Social Security: For most people, Social Security will provide a portion of their retirement income. However, it’s generally not designed to be your sole source of income.
• Pensions: Some people may have pensions from previous employers, although these are less common in today’s workforce.
• Savings and Investments: This is where your personal retirement savings come in. This includes money saved in 401(k)s, IRAs, brokerage accounts, and other investment vehicles.

A common rule of thumb for estimating how much you need to save is the “25x rule.” This suggests that you should aim to save approximately 25 times your estimated annual retirement expenses. For example, if you estimate needing $50,000 per year in retirement, the 25x rule suggests you’d need to save $1,250,000 (25 x $50,000). This rule is based on the idea that you can safely withdraw around 4% of your savings each year without running out of money over a typical retirement period, while also accounting for inflation and investment growth.

Remember, these rules of thumb are just starting points. For a more accurate and personalized retirement plan, it’s highly recommended to consult with a qualified financial advisor. They can help you analyze your specific situation, consider all relevant factors, and create a tailored plan to help you achieve your retirement goals.

Starting to think about retirement savings early, even if it’s just getting a general idea, is a powerful first step towards securing your financial future and enjoying the retirement you envision.