Saving for retirement is like solving a Rubik’s cube: strategic, obtuse, and (once it’s finally solved) satisfying. Similar to saving money, there are multiple ways to solve a Rubik’s cube giving the player various avenues to get it right.
Saving for retirement can be thought of in this way. There are systems set in place to help guide you in the right direction, but ultimately your savings strategy is uniquely yours. But there is one question that still remains: how much money do you need to save to retire?
This is a question on the minds of every working American. Unfortunately, there’s not a straight answer for how much money you will need when you retire. Each person’s financial situation is different, and the combination of that and your personal lifestyle needs will determine the amount you should have saved for retirement.
In order to help break down some of the potential costs of retirement, I’d like to break it down into 3 layers:
- Lifestyle
- Life expectancy
- Legacy
These three elements will help you create a savings strategy for your retirement needs.
Lifestyle
How do you see yourself in retirement? Maybe you want to travel the world and live abroad or perhaps you want to downsize and move closer to your children. These two scenarios require quite different planning techniques. For example, you would probably need more money to travel for an extended amount of time than you would if you downsized.
Your spending habits are a crucial part of your retirement lifestyle. Do you want to buy a fancy new sports car, or splurge on a new accessory? Assessing your spending desires and actions is a crucial part of understanding how much money you will need. If you have a habit of spending a lot of money before you retire, that habit probably won’t disappear overnight. It is important to help curb your spending before retirement so that you don’t end up in debt.
Aside from traveling and buying new toys, your health is another significant factor to consider in your lifestyle plan. Even a healthy couple can spend a significant amount of money on healthcare when they retire so having a sense of how much your health care, prescription coverage, and other medical needs will cost are crucial to factor into your retirement funds.
Life Expectancy
The number of years that a person will be retired varies significantly, making it difficult to come up with an accurate projection of how much money will be needed. But there are a few benchmarks that many financial advisors use to help their clients:
- Save up to $1 million
- Have 60% of your final employment earnings saved
- Withdraw 4% of the money in your retirement accounts per year
These figures are just numbers though and will vary based on your situation. The most important thing to think about here is the timing of your cash flow. Your cash flow will look so different in retirement because you are no longer on a payroll system. If you take out too much money too early, you may have to dramatically change your lifestyle so that you don’t run out of money. Take this into consideration when you are nearing retirement age. Plenty of people can retire, but is it the most lucrative time for you?
When you are looking at the numbers, it is important to layout different figures. One way to do this is to reverse engineer your costs. Look at your answers from your desired retirement lifestyle: where you will live, what your spending will look like, what your health care costs will be and calculate a figure from those answers. You can also assess your current spending habits by adding up your monthly costs if you expect them to stay the same when you retire, to come up with a number.
The important thing to know is that there are many factors contributing to your financial needs in retirement. Looking at your budget from all angles will be especially helpful when you are looking at nailing down the numbers.
Legacy
When you are thinking about your financial needs in retirement, it is important to think about what you may leave behind.
- How much money do you want to leave?
- Are your beneficiaries updated?
- Do you want to donate assets to a charity or organization?
These questions will help you think about not only your own needs but the needs of others after you are gone. Your legacy is an important part of your retirement plan. Figuring out what you want to leave behind will help determine how you will spend and manage your money in the present.
The bottom line is that when it comes to saving for retirement, there are more questions than answers. When you assess your lifestyle desires, your health needs, your family needs, and your legacy you will be able to design a savings plan that works best for you.
