One of the first steps in retirement planning should be to estimate what kind of income you’ll need to cover your expenses. From there, you can figure out how much money you need to save overall.
While that may sound easy on the surface, it can be difficult to estimate what your expenses will be 10, 20, 30, or even 40 years from now. Here are a few guidelines to help you figure out how much money you need to retire.
Project your retirement expenses
Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. While it can be hard to know what, exactly, you’ll want to spend your money on in retirement, or how much those things may cost with inflation, listing out some big picture items can help you estimate how much you’ll need to cover them.
To help you get started, here are some common retirement expenses:
Food
Consider your current and expected habits. You might eat out less in retirement or be less inclined to cook at home as you age.
Housing
Include rent or mortgage payments and any associated taxes. If you expect you may need to update your home or furniture to accommodate you as you age, consider setting aside a bit more for this line item.
Utilities
Think through your current expenses and adjust for inflation, which averages about 3% a year. Make sure to include gas, electric, water, telephone, and internet.
Transportation
The way you commute may change once you retire, and as you age, but to be safe, include estimates for car payments, auto insurance, gas, and maintenance. If you travel frequently, or have family in different parts of the country, consider padding this estimate a bit.
Healthcare
Healthcare tends to be one of the most significant retirement expenses, and Medicare doesn’t cover everything. Think about vision, dental, and long-term care, as well as how much you may want to spend on supplemental coverage. Make sure you think about the costs that won’t be covered by insurance, too: deductibles, co-pays, and the like.
Taxes
This estimate can be a bit of a catch-22, since your tax rate in retirement will be influenced by your retirement income. The important part is to make sure you plan for tax in retirement.
Remember, any money you saved in a traditional retirement account will be subject to income tax when you withdraw it. Social Security benefits are mostly taxable as well.
Recreation
Make sure you budget for fun in retirement. After all, how many activities or adventures did you put off while you were working, saying you’d do them when you had more time?
Dependents
Think about the people (and pets!) that rely on you now. Will you need (or want) to help support them financially in the future?
These expenses should help you get a sense of how much money you’ll need in retirement. Keep in mind, it’s likely your retirement expenses will change from year to year and evolve over time. You may spend more money on travel when you first retire, for example, and more money on healthcare as you age.
Overestimating a bit on some of your expectations can help you avoid a few common retirement mistakes.
Identify your sources of retirement income
Some of the line items around your expected expenses in retirement depend on your source of income. For instance, tax payments may be less of a consideration if you’re able to save for retirement in a Roth account, since you can usually withdraw that money tax-free in retirement.
Similarly, if your employer offers a pension, your monthly benefits may (or may not) be adjusted for inflation.
List out the different sources of income you expect to have in retirement. These may include a 401(k) or similar employer-sponsored retirement plan, IRAs, annuities, and other investment accounts. You may also decide to work part time in retirement.
Finally, be sure to factor in Social Security benefits. You can get a rough estimate of your possible benefits on the Social Security Administration website. Just keep in mind: This amount may vary based on how much you earn during your career and when you start collecting benefits.
Put it all together
Depending on how close you are to retirement, you may be able to use the information you’ve documented so far to estimate whether you have enough saved for retirement. If you’re still a ways out, your goal should be to save strategically across different accounts to help you maximize your income in retirement.
In either case, a financial advisor can help. Advisors can help you diversify your investments across different types of account to minimize taxes in retirement, for instance. An advisor can also help you estimate potential returns so you can adjust your savings rate accordingly.
At Bogart Wealth, we practice holistic financial planning, meaning we go beyond investment advice. That means we can help you review and potentially adjust your expected expenses in retirement, in addition to getting strategic about potential income sources.
If you have questions about your income in retirement, your retirement saving strategy, or how a financial advisor can help, contact Bogart Wealth today.
