Estimating your retirement expenses can sometimes feel like you’re aiming at a moving target. How much should you be putting away right now? How can you know when you have enough? At the end of the day, if you want a secure retirement, you need to predict how much you are going to spend.
Budgeting is useful when you are working, but it is completely necessary for retirement and retirement planning.
The first step in learning how much money you’ll need in retirement is to assess your current expenses. You should know how much you’re spending each month on housing, food and other necessities. It’s also important to consider the cost of healthcare, transportation and other costs that may increase as you get older.
In order to estimate your retirement income, you can use any of a number of retirement calculators. Many good financial advisory websites offer free versions that are sufficient for many getting started. The key is to find one that is easy to use and provides enough information about how much you need for retirement.
The best way to do this is by making sure the calculator has:
- An explanation of how it works so you understand where your numbers will come from and what they mean
- A variety of scenarios so that you can get a sense of whether different spending or savings levels will impact your bottom line (i.e., if there’s only one scenario given in the calculator)
- Input fields for all major expenses such as housing costs, health care expenses and insurance premiums
Before you can determine how much you’ll spend in retirement, you first need a good handle on your current expenses. If you’re like most people, your finances are probably somewhat chaotic—and that’s okay! You just need to take stock of where things stand today and make some educated guesses about what they might look like in the future.
Your best bet is to sit down with pen and paper (or your computer) and add up as much of your current spending as possible: what are all those credit card bills? How much do we spend on groceries each month? How many tanks of gas does my truck go through per year? How often do we visit our family for holidays? Where does all the money go? This can be overwhelming at first, but once you get started, it gets easier pretty quickly.
Now that we have an idea of our current income, savings rate and debt levels, let’s take a closer look at our investment portfolio by taking a quick gander at our 401(k)/IRA accounts.
Different areas have different costs of living, so the amount needed to retire comfortably may vary from place to place. For example, according to data from the Bureau of Economic Analysis, the Bureau of Labor Statistics, and the Institute for Health Metrics and Evaluation, the estimated total retirement spending in Michigan is $1,021,429 (20th least), whereas in Washington the estimated total retirement spending is $1,254,718 (7th most).
On average across the whole of the United States (based on average annual spending for American seniors and the national average life expectancy at age 65 of 19.4 years), the average American will spend about $987,000 from retirement age on. And those hoping for a more comfortable and financially secure retirement should plan on saving a little more.
Travel is a big expense in retirement. If you plan to travel around the world, then the cost of your travels can really add up. But if you want to retire and still be able to afford to take several trips each year, it’s important for you to know how much money you’ll be spending on flights, hotels and other costs associated with going places.
Another major factor in how much you’ll spend during retirement is your health. If you’re healthy, then chances are that you won’t have as many medical bills and will be more active and able to save money by cutting down on grocery shopping expenses or having a lower cellphone bill.
On the other hand, if your health isn’t so good, then it’s likely that you’ll have higher expenses for medications and doctor visits just to stay alive—let alone enjoy yourself! This can cost thousands of dollars each year in co-pays alone—and that’s not even counting the costs associated with any surgeries or procedures that may be required.
The best way to plan for retirement health care costs is to make sure that everyone has adequate coverage before they retire The best bet here is typically through Medicare or Medicaid because these programs provide excellent coverage at low cost (though there are still some gaps!).
Unless your only source of funds is Social Security, it is likely you will pay taxes in retirement. You can use an estimated tax rate, such as 25%, which is better than not accounting for taxes at all. However, to come up with an accurate dollar amount—and to set up your tax withholding or quarterly payments—you will need to do a tax projection.
A tax projection uses current income and expenses to project taxable income for the entire year. This allows an estimate of tax due. While this service helps set aside money for future taxes owed, it does nothing to actually help save money on taxes. For that aspect of savings, you should sit down with your trusted financial advisor.
In the end, the only way to know for sure how much money you’ll need in retirement is to go through the process of crunching the numbers. This can be time-consuming and frustrating, but it’s worth it if it helps you avoid running out of money before your golden years are over.
You have a lot of options for how to tackle one of the most important aspects of retirement planning — predicting retirement expenses. It doesn’t matter too much which option you choose. What matters is that you create a plan that is detailed and personalized.
If you’re not as prepared as you hoped for when approaching retirement, CKS Summit Group are here to help.
To combat financial uncertainties in your golden years, you need a portfolio which is capable of producing increased income, stable growth, preservation of principal, safety and flexibility all at the same time.
CKS designs custom portfolios to protect during uncertainty and perform during prosperity. Get in touch with us to set up your complimentary strategy session today. We look forward to hearing from you.