Make sure you are prepared for all the costs that come with retirement.

Make sure you are prepared for all the expenses that come with retirement.

From the first day you walk into the office until the last time you clock-out, enjoying a quality retirement is the goal. Paying into Social Security, a 401(k) plan, and an IRA account are all great ways to ensure that you can enjoy this new phase of your life. But, even after taking all the right steps, will it be enough? 

How Saving Works

Saving for retirement is based upon incremental saving. The incremental process is the slow, but steady accumulation of financial resources that one needs to have in order to create the chance for a great retirement. The problem with retirement for Baby Boomers who are now approaching the age of 65 is that the cost of a decent lifestyle in America far exceeds the government-sponsored benefits. Additionally, the amount put away in private funds, such as those in a 401(k) plan, can be used up before the average lifespan of a person.

Managing Social Security

Since Americans are living longer, this also means the period of retirement is longer. The Social Security Administration says that the average benefit check sent out monthly in 2016 for those who qualify is $1,232.39.

The average rent in America is $934 per month. If you live in a big city, you will pay up to twice this amount. If you are a homeowner, a monthly mortgage payment on a $500,000 home is over $3,000 per month. This means that having enough to live comfortably means looking at sources outside of Social Security.

A Basic Example

Let's say you want to have $5,000 per month after retiring at the age of 65 and you live to the average American lifespan of 78.8 years, as reported by the Center for Disease Control and Prevention (CDC). You would need a minimum of 13.8 years, or about 166 months, of $5,000 per month. You'll need about $830,000, but that does not take into consideration that some of the money is making modest earnings.

So, to be safe as a retiree who is going into retirement in 2016, a person needs to have about one million dollars. This does not consider the risk of major health problems that might occur or the need for very expensive long-term care.

Spend Less, Need Less

Many active adults choose a more modest lifestyle in their retirement in order to reduce expenses and extend their nest egg. They sell their large homes and move to an age-restricted adult community that has all the amenities and less of the responsibilities. Not only do these communities provide opportunities to develop camaraderie, but many of them have several options for smaller, low-maintenance homes. This means not only a lower mortgage payment, but also less money spent on upkeep.

It is clear that retirement is expensive, especially for those who want the retirement of their dreams. A million dollars is not what it used to be, but this number is a good general goal for any retiree. With sufficient financial support, you can have the retirement of your dreams.