“There is no magic number,” Michelle Howell, vice president and financial consultant, said in a recent Fidelity Investments webinar. “There’s no universal savings amount that we each need to save. It’s really personal to you and your family.”
The good news: a simple checklist can make the process seem far less daunting.
Know What You’re Spending Now
The first thing is to assess your current situation.
“As a starting point, you’ll need to estimate your retirement expenses,” said Rita Assaf, vice president of retirement offerings at Fidelity. Take a look at your bank statements, see what your current take-home pay is as well as that of a spouse, or partner. Track your cash flow.
Then, separate out the current expenses that you won’t have in retirement. Maybe they are commuting costs or money spent on work clothes and lunches eaten in a downtown restaurant. Are you helping a child out with education expenses that may end before you retire? You might be surprised by how much this all adds up to.
Once you have a core list of expenses that will continue into retirement, such as a mortgage, then you have a better idea of what monthly income you might need. “In retirement, you should expect to spend about 55% to 80% of your pre-retirement income,” Howell said. That’s quite a range, depending on how much your pre-retirement income is. Ideally, you should be able to cover most, if not all, of your fixed expenses from guaranteed income sources like Social Security, or annuities if you so choose.
“The variables are health care costs and your lifestyle, and that will lend a lot of influence to these numbers,” Assaf added.
Consider Your Future Expenses
Next, make a list of your wants.
Do you envision a lot of travel? Visiting kids and grandchildren? Moving to a new location or remodeling your existing home? This will give you an even better idea of what your expenses will be and the income you need to cover them. The good news is you have some discretion over these costs.
If you come up short, you can adjust how much you are saving. Or you could think about working part-time in retirement, as many older Americans do.
Don’t Discount Health Care Costs
Health care costs are another factor to consider as you plan.
Justin Bailey, Fidelity’s regional vice president of planning solutions, said based on their client data, an average 65-year-old retiree can expect to spend about $172,000 in medical out-of-pocket expenses over the next 20 or 30 years.
“That’s going to be spread out, hopefully, over 30 years,” he said. “But it’s going to be part of the budget.”
Medicare will pay for some health care costs for those 65 and over. But the program does not cover everything, so people will need to consider supplemental coverage or Medicare Advantage plans. You can’t foresee what health problems you might encounter, but you can assess your current health and whether you have chronic conditions that will follow you into retirement.
Plan for Your Lifestyle and Legacy
What will you do with your time? Many people enter retirement with no idea, or perhaps unrealistic dreams of climbing mountains and other pursuits. Be realistic. What are your daily activities now and your hobbies or weekend activities? Chances are they may be similar once you retire. Do you have heirs and do you want to leave them anything? That could be an important factor in how much money you will need.
If you don’t have one, it may be time to get a will and investigate the various legal documents such as powers of attorney and health care directives that you might need. In all cases, consult with trusted advisors.
No one knows what the future holds but a little planning in the present won’t be in vain.