There is no magic number that works for every person when they ask how much money they will need in retirement. There are, however, a few guidelines that can help an individual or a couple determine about how much they will need to retire comfortably.
One of the general theories is that people should have roughly ten times their current salary saved by the time they reach 67. Another good fact to know is that retirees should aim to replace 70% – 90% of their annual pre-retirement income with savings and Social Security.
Many people believe that their expenses will drop drastically after they retire but there are a few categories that will still require spending on a similar level as their pre-retirement years. Those areas include housing, transportation, food and entertainment. And one cost that could increase dramatically is healthcare.
If you retire before you qualify for Medicare then you could pay a great deal for private medical insurance. Clearly, your current income and standard of living will have an impact on how much you will need when you retire, as will the age at which you retire. Once you have calculated what your magic retirement budget should be, you will want to take a close look at some retirement income strategies to ensure your financial future.
Reduce Your Fixed Expenses
Knowing that one of most retiree’s largest expenses is housing, it only makes sense to do everything that you can before you retire to cut that future living expense. Working an extra year or two to pay off a mortgage will substantially lower your monthly housing cost. If your mortgage has more than just a year or two remaining, then consider downsizing to a home that you could pay off with the proceeds of selling your current home. In addition to housing, focus on paying off any car or personal loans to keep your monthly fixed expenses as low and manageable as possible after you retire. Decreasing your expenses is sometimes equally as important as increasing your income, and sometimes it is the one option that you have more control over.
Build Your Nest Egg
Prior to retirement, you have the option to save more effectively using a 401k account or an IRA. Many retirees will need to rely on their savings to bridge the difference between their Social Security benefits and their actual living expenses. And beginning at age 50, you will be able to save more in each of these retirement savings accounts and still enjoy the tax benefits of the plans.
This “catch up” contribution is a great way to save more in the years remaining before you retire. This age also coincides with the time in most people’s lives when they have more disposable income as they are no longer paying for college tuition and they are at the peak of their earning potential.
The 4% Rule
The 4% rule is a common number that is used to determine how much a retiree could and should plan on drawing down their retirement savings each year. The number takes into consideration the potential interest rates as well as the estimate life expectancy and was derived to ensure that a person would not outlive their savings.
Using the 4% rule you can access just how much you would be able to take out of your savings each year and also determine if that amount, along with Social Security and any pension funds, will be sufficient for you to live on.
It’s Not Enough
Due to economic challenges over the past decade, many people are facing retirement knowing that they have fallen short of their savings goals. They know that Social Security and their savings are not going to be enough to live on. And as a result, they are contemplating several different options to fund their future.
The first option is to delay retirement. This affords more time to save. To increase the amount that they will be able to save, many older people are downsizing and simplifying their lifestyle which aids in living more frugally.
Everything from selling unwanted or unneeded items to living in the latest tiny houses are options for decreasing current living expenses in order to save more for retirement.Relocation
Another popular way to stretch your retirement dollar is to relocate to a more affordable area. Many consumers have always dreamed of retiring to a sunny, warm climate and an additional benefit might be a more affordable sunny, warm climate.
Living in an area where heating and other utilities are more affordable, where public transportation is more accessible and where the cost of living over all is lower, can make a big difference in much you can get for your 4%.
Rediscover and Reinvent
Even after working a few extra years and relocating to a more affordable region, many older people are finding that their income is just not enough to cover all of their expenses. So they are choosing to return to work, at least part time.
Many are trying a job that is completely different from the job that they just left. It is a time when a smaller paycheck is ok and it affords them the freedom to try something new and exciting, like getting title loans with no job. Some are staying in the same field that they had worked in but are only consulting on a part time basis.
And others are choosing to join the ever growing community of freelancers and gig seekers. They use ad boards such as craigslist to find one time jobs or tasks to complete for others and work as often or as little as they need to meet their budgetary needs.
What You Need is Up to You
There are estimates and guidelines that will help you to establish a rough idea of what you will need to live on in retirement. But the biggest factors are up to you.
Selecting the lifestyle that you want or need and the location where you want to live will have a huge impact on the cost of your retirement. So whatever you choose, know that there are many retirement income strategies that can help you reach your goals and live the retirement that makes you happy.