When planning your retirement, the first question you’re likely to ask is how much money you will need to save before you can stop working. The answer is different for everyone, but the process of finding the answer includes considering the same basic questions. You will have to think about the lifestyle you want to have in retirement, possible healthcare needs, and emergencies, and how you will adjust for inflation.
How do You Want to Live?
Planning your retirement lifestyle is an important step toward deciding how much money you need to retire. Do you plan to travel, buy a dream car, go back to college or pursue a long-forgotten hobby? Do you want to help your grandkids pay for college, buy a vacation home, or buy season tickets to the opera or for your favorite sports team? The way you envision your retirement will dictate the needed size of your nest egg.
Start putting together a list of the things you want to do in retirement and estimate the annual cost of your dream lifestyle. One common guideline is that you will need about 80 percent of your current annual salary after you retire. However, that will depend on your retirement plans.
Once you have an idea of how much you will need each year, consider your life expectancy and the age you would like to retire. You can use this information to figure out a rough estimate of the amount of money you would need to meet your retirement goals. You may decide that you need to compromise your plans either by retiring later or adjusting your retirement lifestyle to be more in line with what you can afford.
When planning your retirement goals, it’s important that you remember to adjust for inflation. It’s easiest to plan your goals in today’s dollars, but you then need to make adjustments to keep inflation from causing your nest egg to fall short.
Another important factor to remember is that your healthcare needs are likely to change in retirement. As you get older, you may have more medical, dental and vision expenses than you do now. You should also prepare for emergencies (medical or otherwise) which could take a significant bite out of your retirement savings.
What about a Second Job?
Many active adults find that a partial retirement is better than stopping work entirely. Having a part-time job, taking on consulting work or even starting a second career will increase your income and potentially offer additional employee benefits. Instead of making plans to stop working completely, you may want to consider a tiered approach to retirement, where you can cut back on your hours (and income) incrementally.
There is no magic number for how much money you will need to retire. The goal for your nest egg will vary from other people’s plans. To find your own best approach, you will have to consider your retirement goals, estimate your life expectancy and remember to adjust for inflation. These steps will help you find the right answer for your own retirement goals.