Retirement savings are an important part of a successful career. Having enough money saved means you won’t find yourself struggling during retirement.
But how much do you actually need? That may seem like an impossible question, especially if you haven’t had much guidance on the topic.
However, it doesn’t have to be extremely complicated or difficult. While it may not be easy to figure out the exact amount of your future expenses, there are steps you can take to make a fairly close estimate.
And that is exactly what we will cover in this post.
Estimating your expenses may seem like a daunting task, but it doesn’t have to be. The first thing you should do is start with what you know. There are a couple of ways you can do this.
One way is to start making a list of your monthly expenses. This will be easy for expenses that are the same every month, such as an internet or TV bill.
Other expenses will be variable, of course. You will likely use less electricity during the more temperate months when heat and cooling aren’t needed.
For these and other variable expenses, take a look at old receipts. If you pay all your bills online, you can use your bank statements to make things even easier.
On that note, another easier way to estimate your annual expenses is to simply check how much you spent for the past several years.
If you do this, though, don’t forget to think about special occasions that could have run up your expenses, such as an international vacation or if you got married.
Remembering to account for those special occasions, you can even average the past several years of expenses for a rough estimate of what you typically spend in a year.
Once you have an estimate of your typical, annual expenses, you can start multiplying that by different numbers of years. If you are 30 years old for example, you can multiply it by 50 and 60 to see how much money you would need for a given period of time.
It may not be fun to think about how much longer you might live, but it’s best to be prepared for the future.
Estimate Health Care
Health care, too, is admittedly tricky to estimate. Fortunately, there are various research-backed articles out there that can help us estimate.
The 2019 estimate for a married couple retiring at age 65 is $285,000 worth of health-related expenses for the remainder of their lives. For males, the estimate is $135,000, while for females, the estimate is $150,000.
However, this estimate doesn’t include long-term care expenses. Again, these expenses can vary widely, with about half of adults incurring no long-term care expenses.
But on average, long-term care costs for older adults ranged from $19,500 to $102,200 in 2019. These costs are not included in the figures listed above.
Again, it’s difficult to know whether you will need long-term care. But some people’s health requires more attention than others.
On that note, the $285,000 figure mentioned here is just an estimate. That means that while some adults may not need this much to cover health care costs, others may need more.
Don’t Forget “Fun” Money
To this point, we’ve only considered essential expenses – things most of us wouldn’t be willing to go without. What we haven’t considered is the money you’ll spend on experiences and things just for fun.
After all, you’re retired, right? You may as well enjoy yourself a bit!
Even if you’re like me and live a modest lifestyle, you shouldn’t deprive yourself in retirement if at all possible. For example, if there is a big trip you’ve always wanted to take, but never had the time, why not add that to your calculation?
Estimating trip expenses is beyond the scope of this article, but there are plenty of calculators you can use to help add up potential expenses.
And Don’t Forget Inflation
Inflation is something many people fail to consider, but it is inevitable. That’s why it’s best to account for it if you can.
There is one small problem here, which is that inflation is hugely complex and based on a large number of factors. And these are things that haven’t happened yet, so it’s impossible to know exactly what it will be.
That said, as usual, the past is our best point of reference. And since 1913, the average inflation has been 3.22%.
Now, say your average expenses are $50,000. With a 3% inflation rate, that $50,000 in 2000 has become $75,000 of expenses in 2020.
This does sort of throw a wrench in the retirement wheel. But if you take the expense estimate you have so far and multiply it by 103% each year, you should get an idea of how inflation will look.
Manage Your Retirement Investments
Proper management of your retirement investments is just as important as anything else we’ve considered so far. If you don’t have a good investment strategy, it will be difficult for your money to grow.
The same is true if you draw your investments down too quickly. If you can strike the right balance, it may actually be possible to never run out of money.
First, there is managing your investments. Early in your career, it is best to invest in a broad mix of equities to give your money the best chance to grow.
If that sounds overwhelming to you, there are always robo-advisors like Blooom which can help manage your retirement investments specifically. All you do is answer a few basic questions, and the robo-advisor does the rest.
As far as drawing your investments down, many investors like to use the four percent rule. The four percent rule refers to a retirement strategy wherein you draw down (at most) four percent of your retirement portfolio each year.
Why four percent, you ask? There are two basic reasons:
- 4% is a modest rate of return. If you are still invested in stocks in retirement, you may be able to make close to that return each year.
- 4% makes for simple math. For example, if you have $1,000,000 saved, and you divide it by 25, you end up with $40,000. $40,000 is 4% of $1,000,000. That is how much you can spend in one year. You can divide any investment portfolio by 25 to get your 4% number.
No, the four percent rule is not perfect. Many investors like to draw down 3.5% or even 3%. Still, it is a good rule of thumb and can give you an idea of how much you could spend based on your retirement portfolio.
Stick to Your Plan
Lastly, don’t forget to stick to your plan. Ideally, you should regularly save the same amount toward retirement. That may be monthly or each time you get paid.
Yes, life happens, but it’s important to do everything you can to stick to your plan. Don’t allow yourself to fall out of your good habits simply because you decide you want to spend your money now.
After all, years of saving for retirement will help ensure you meet your goals.
Image source, www.gotcredit.com, via Flickr.