Making plans to retire is not something that can — or should — be done on a whim. It takes years of prioritizing, calculating and saving.
Before you clock out for that last time, one of the most important numbers you need to have on hand is an estimate of your yearly expenses.
It can be hard to predict exactly what those numbers will look like while collecting Social Security in retirement, since so many external factors play a role in the calculations. But making a plan that takes into consideration whether you intend to spend more, spend less, or spend about the same amount is a good place to start.
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When you make your list of expenditures, make sure you take into account your unique situation. Do you prioritize travel? Do you plan to help pay your grandchildren’s tuition bills? Would you like to buy a new car? Each of these line items will depend on your spending priorities.
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Jean Chatzky’s advice on how much money is needed for retirement
Once you arrive at your baseline number, determine if you intend to spend less in retirement. If that’s the case, multiply your total annual expenses by 0.75.
If you intend to spend about the same amount as you spend today, multiple your total annual expenses by 0.85 percent.
And if you intend to spend more in retirement, multiple your annual expenses by 0.95.
Once you arrive at the total for whichever scenario, multiply that number by the number of years you intend to be retired. The average length of retirement for a person in the U.S. is 18 years, according to Guardian Life.
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Here’s an example: Let’s say you currently spend $5,000 a month on the fundamentals like housing, insurance, food, medical care, entertainment, utilities and transportation. On an annual basis, that’s $60,000. If you intend to spend less in retirement, multiply your total by 0.75. That comes out to $45,000. If you intend to be retired for the average length of time, 18 years, you’ll want to have a minimum of $810,000 in retirement funds on hand before you retire.
Keep in mind some costs will likely only increase as the years go by. Health care costs, for example, rarely go down. On the other hand, if you’re close to paying off a mortgage, that is a monthly budget line item that you’ll be able to wipe from your balance sheet.
“Knowing where your money could come from to cover your retirement is critical,” said Jean Chatzky, best-selling personal finance author in an interview with AARP.
It’s a critical step to help you prepare and also to feel more confident in having enough money through retirement.
Chatzky, who is also the host of the HerMoney podcast, worked with AARP to create a pre-retirement checklist that will help future retirees keep track of all the numbers. (Fidelity has a free retirement income calculator you can use to run your own scenarios.)
Jean Chatzky shares the three typical sources of retirement income
Chatzky says there are three main sources of retirement income that will help you reach your monthly requirements.
“First of all, there is paid work,” she says in the AARP interview. “And one thing we know is that many people are continuing to work during ‘retirement.’ Some are doing it because they have a need for the money, but others are doing it because they like it. It is keeping them social, it’s keeping them engaged, it’s keeping them happy.”
Then comes Social Security, the retirement benefits that you’ve earned by working and contributing to the Social Security system over the years.
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“And finally, there is your savings and your investments, the money that you’ve pulled together over the years and that you’ve invested to grow,” Chatzky said.
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Chatzky also worked with AARP to create a preretirement checklist that includes a series of “action steps,” that can help people planning for retirement stay on task. The steps include:
- Calculate your estimated amount of money needed in retirement;
- Calculate your current retirement savings amount;
- Set up or review your my Social Security account at mySSA.gov;
- Contribute at least enough to your 401k retirement to get the full employer match
- Save and invest in IRAs/non-work retirement accounts.
“When it comes planning for retirement, what you really need is a clear picture of what you have. You need to know where you are so that you can get where you want to go. So the way to go about this is first to collect all of your most recent statements from your accounts or to visit your accounts online and add up the current values,” said Chatzky.
“There’s still time to grow your money and close the gap between what you have and what you’re finding that you’ll likely need,” Chatzky said.
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