How much savings will I need to retire? That’s the $64,000 question these days, and to be quite frank, there isn’t an exact answer. But there are some ways to figure out your expenses during retirement that will get you closer.
While nearly 50% of Americans 45 and older said that dealing with daily expenses was their most pressing financial retirement worry, according to a retirement survey from Hartford Financial Services Group, many struggle to estimate what those costs will actually be, experts say. “You can’t project retirement expenses perfectly,” says Carrie Schwab-Pomerantz, CFP, the chief strategist of consumer education for Charles Schwab. You can, however, make a decent estimate, she says. Here are her three tips for figuring out those costs.
Determine which expenses will increase and decrease. For most people, costs like commuting/gas, clothing, retirement savings and eating out will likely decrease somewhat, while costs for travel, entertainment/hobbies and possibly philanthropy will increase somewhat, she says. But “health care is the biggest variable in retirement planning,” she adds. In fact, a study by the Employee Benefit Research Institute finds that the average couple (both age 65 today) with average life expectancy could need $295,000 to cover premiums for health insurance coverage and out-of-pocket expenses during retirement — more if they live longer than average of have higher-than-average drug use. Click here for more details on how to plan for health care costs.
Decide on the lifestyle you want to live. Do you plan on living it up in retirement or do you plan on downsizing and relaxing? The answer to this question plays a big role in how much you’ll want to save. Schwab-Pomerantz says that those who want to live it up — say, by traveling a lot or buying a second home — should plan to spend 100% to 125% of their current income in retirement. For those who just plan to maintain their lifestyle, planning to spend 80 – 100% should do the trick, and for those who plan to significantly downsize, 60 – 80% might be OK (though, she warns, that saving this little can be risky because “a lot can change over 30 years”).
Prepare a detailed budget. As you near retirement, it becomes increasingly important to prepare a detailed budget, she says. Use this worksheet to help you make a retirement budget. Schwab-Pomerantz adds that it is important to break your expenses into two buckets — essentials (like food, health care and rent) and discretionary (like travel and entertainment) so that you can at least make sure you have all the essentials covered. She also recommends that you have a two years worth of income in cash, as opposed to investments, just to be safe.
Also, check out Schwab’s Retirement Planner for more information on how much you’ll need to save for retirement.