This assumption could ruin your retirement plans
One of the hardest things about planning for retirement is that it’s difficult to estimate your living expenses years in advance. Imagine you’re in your 30s and trying to get a grip on the cost of retirement. At this point, you may be 35 to 40 years from that milestone. How on earth are you supposed to come up with numbers when we don’t know what inflation has in store for healthcare, housing and the other expenses you have to deal with?
Also, you may be too young to have a solid idea of what you want your retirement to look like. You could think You will be happy to spend your final years traveling the world. But as you get older, the idea of staying closer to home might become more appealing.
For this reason, retirement planning is a difficult thing – no doubt about it. However, one assumption that should not be made when planning for retirement is that as a senior you can get by on a fraction of your usual income. In reality, no matter what your specific lifestyle ends up being, you should actually plan to replace the majority of your income in retirement.
Don’t underestimate this estimate
Some people assume that when they retire they will be able to get by on a third or half of their income. But that’s a mistake.
Many of the basic expenses you pay today are bills you may incur when you retire. So you should at least expect to need about three-quarters of your current income to make ends meet when you stop working.
If you already have higher retirement goals that involve a lot of travel, assume that you’ll need the same income in your final years. And that requires a fair amount of savings. The good news, however, is that if you take the time to build a nest egg, you could put yourself in a solid position to completely replace your preretirement income.
Say you start funding an IRA or 401(k) plan at $500 a month at age 30 and continue to do so until age 67. That’s the full retirement age for Social Security if you were born in 1960 or later.
If you invest most of your savings in stocks, chances are your investments will produce an average annual return of 8% over those 37 years. This is actually slightly below the average for the broader market. And if so, you’re looking at a nest egg worth over $1.2 million.
Speaking of Social Security, don’t forget that you can look forward to those monthly benefits. They won’t be enough to live on, but if you do your best to file strategically, they can serve as a generous source of income on top of the money you save yourself.
Give your best
It is extremely difficult to estimate your retirement costs decades in advance. That’s why it’s worth going to the side and needing plenty of replacement income. You could be prepared to replace 85% of your previous income only to get by on 70%. But that’s a far better scenario than one where you find yourself short on cash because you haven’t saved enough.