Saving for retirement can feel like you’re running a marathon without knowing where the finish line is. You don’t know exactly how much farther you have to go, but you’re doing everything you can to get there while conserving the energy to enjoy the journey.
In other words, you might not know exactly how much money you need to save for retirement, but you want to save enough to last your lifetime while enjoying a comfortable lifestyle as you work toward the goal.
Knowing how much to save for retirement is one of the top concerns for most pre-retirees because running out of money too early can be catastrophic. But figuring out the amount of money you need to save is difficult. The number is usually large, and it hinges on several unknowable factors, including:
- The number of years you’ll be retired
- The amount of money you’ll spend per year
- Unforeseen life and medical emergencies
- The rate of return you can expect on your investments
Luckily, there are ways to estimate these factors, which are all unique to your circumstances, goals, financial habits, and personal characteristics. Unfortunately, there’s no magic number that works for all retirees, but we’ll show you how the answers to four important questions can help you discover the number you need to save for a comfortable and successful retirement.
1. How much money do you plan to spend per year?
The first step to determine how much you need to save for retirement is to evaluate how much you think you’ll spend each year to cover your expenses, maintain a comfortable lifestyle, and plan for unexpected emergencies. You can start by envisioning your ideal retirement to anticipate future expenses and estimate how much your ideal lifestyle will cost you.
If you plan to spend most of your time relaxing at home and playing with your grandchildren, saving a smaller amount of money might work perfectly well for you, as your lifestyle won’t cost much to maintain. But if you plan to take exotic vacations and travel the world, then you’ll need to save more to afford that kind of lifestyle.
Of course, some of your daily expenses now may no longer be present in retirement. If your mortgage is paid off when you retire, that’s a significant monthly cost you’ll no longer have to budget for. If you have children living at home now, you’ll no longer be paying for their groceries, clothing, or phone bill when you’re retired (at least, we hope not!).
2. What kind of medical costs do you anticipate?
You also need to plan for the fact that as you get older, your medical costs will likely increase. It’s impossible to know what type of medical care you’ll need or how often you’ll need it, but Fidelity estimates that the average amount a 65-year-old couple will spend on healthcare throughout retirement is $285,000 (not including long-term care or costs associated with chronic illness).
You can look at your family history to estimate future healthcare needs. For example, if your parents or grandparents have suffered from breast cancer, heart disease, or an illness that requires long-term care such as Alzheimer’s, it may be best to err on the side of caution and save more to account for the costs associated with those illnesses.
3. What is your estimated life expectancy?
Life expectancy is another important factor to consider because it helps you estimate how many years you’ll need to draw income from your nest egg. You can look to older family members to estimate your own life expectancy. If your grandparents lived well into their 90s, it’s probably a good idea to save enough money to last you a few decades.
Saving enough to generate income for several decades of retirement can be daunting, so it’s best to work with a financial advisor who can help you strategize how to make up for gaps in your savings. Maybe you need to work a few more years than you originally anticipated, or perhaps you can discover ways to cut your expenses and allocate more toward retirement savings.
4. What rate of return can you earn on your investments?
When it comes to investments, nothing is guaranteed. No one can accurately predict the rate of return you’ll earn on your investments during the accumulation period or during retirement. Investment vehicles that do offer fixed rates of return, such as certificates of deposit or annuities, often don’t provide high enough returns for sufficient growth or even to outpace inflation.
However, we can look at historical data to provide some idea of how much you can expect to earn on your investments in the long-term. Between 1926 and 2020, Vanguard found that average returns for a diversified portfolio fell between 7% to 9% per year. These rates will fluctuate – sometimes significantly – depending on how your portfolio is invested and circumstantial factors like market volatility. Therefore, it’s usually in your best interest to slightly underestimate return rates rather than overestimate and fall short.
Partner with a professional who can help
When you answer these questions in detail, you’re better able to determine how much you need to save for retirement. Your goals for your lifestyle, your ability to save, and your investment mix are likely much different than your next-door neighbor’s. And while this does make retirement planning more complex, it also gives you greater opportunities to design the retirement you want.
If you’re ready to pursue that vision, give us a call today. At Caviness Wealth Management, we specialize in helping you prepare for the future. We can assist you in determining how much you need to save for retirement and design income withdrawal strategies that are sustainable and tax-efficient. Contact us today to schedule an appointment.
