Answering these questions can help you avoid running out of
money in retirement.
Katie
Brockman Aug 24, 2019 at 6:53AM
Saving for retirement is tricky because there
are so many components to it. How much should you save by retirement age? How
many years will you spend in retirement? How will Social Security benefits
factor into your retirement income?
In addition, retirement saving is highly
dependent on your unique situation, meaning you can't simply look at what other
people your age are saving and assume you should be doing the same. This is
especially true when there's not even a consensus among Americans about how
much it takes to retire. While around 38% of adults say they think retirement
will cost less than $250,000, according to a survey from American Advisors Group, 25%
say it will cost $1 million or more.
To make sure you're saving enough to retire
comfortably, there are a few questions to ask yourself before you retire.
1. How much money will
you need each year in retirement?
The amount you expect to spend each year once
you retire will be the basis for how much you should have saved by retirement
age. It's important to get as accurate an estimate as possible because if you
underestimate how much you'll be spending, you'll run out of money sooner than
you'd hoped.
A common guideline is to assume you'll spend
around 70% to 80% of your pre-retirement income once you retire. So if you're
currently spending, say, $50,000 per year, you may spend between $35,000 and
$40,000 in retirement. However, this is just a ballpark estimate, and the
best way to gauge your future spending is to create a retirement budget.
With a retirement budget, you won't be able to
plan every penny you'll spend, but you should try your best to at least cover
the more significant costs. For example, roughly how much will Medicare cost? Are you planning
any expensive vacations? The more accurate your estimate is, the better idea
you'll have about how much you need to save by the time you retire.
2. Are you investing
aggressively enough to reach your saving goals?
You've worked hard to save for retirement, so it
makes sense to want to play it safe with your investments to lower your risk of
potentially losing your money. But playing it too safe could actually be
riskier financially.
If your investments aren't earning a high enough
rate of return, it will be extremely challenging -- if not impossible -- to
reach your savings goals. Say, for instance, you're 30 years old with a goal of
saving $700,000 by age 65. If you're earning a 7% annual return on your investments,
you'd need to save around $425 per month to reach that goal. But if you were
earning a 2% annual return, you'd have to save just under $1,200 per month.
Even if you start early and save consistently
for decades, you'll need to save significantly more each month to reach your
goals. Savings accounts, CDs, and other "less risky" accounts
with lower rates of return are good for short-term financial needs, but for
long-term goals, your best bet is to invest in the stock market.
Investing in the stock market can be
intimidating, especially since many people are still recovering financially
from the Great Recession. But by investing wisely, you can limit your risk
while reaping the rewards. Index funds and mutual funds are a good
investment choice, because these funds allow you to spread your money across
dozens or even hundreds of different stocks. That way, you can earn solid
enough returns to reach your saving goals while still being safe with your
money.
3. How much will you
depend on Social Security?
Social Security benefits are designed to replace
roughly 40% of your pre-retirement income, and yet nearly half of single
beneficiaries and one in five married couples say they depend on their benefits
for at least 90% of their income in
retirement.
The average Social Security check amounts to
just $1,471 per month, according to the Social Security Administration, which
is tough for many retirees to live on. If you're expecting your benefits to
cover most or all of your expenses in retirement, you may be in for a rude
awakening.
Fortunately, there's an easy way to see
approximately what you'll be receiving in benefits once you begin claiming.
By creating a mySocialSecurity account,
you can get an estimate of your future benefits based on your real earnings,
giving you an idea of what you can expect to receive. Once you know how much
you'll be spending each year in retirement, as well as how much you'll be
receiving in Social Security benefits, you can determine how much of your
retirement income will need to come from your personal savings.
4. How will you cover
long-term care costs?
When you're planning fo retirement, growing old
and spending your final years in a nursing home is probably the last thing you
want to think about. But 7 in 10 retirees will need
long-term care at some point, according to the U.S. Department
of Health and Human Services, and those who do require this type of care will
need it for an average of three years.
Long-term care also isn't typically covered by
Medicare, and the average semi-private room in a nursing home will cost you nearly $7,000 per
month. At that rate, you'll be spending roughly $250,000 on
long-term care over three years. You could pay even more in some areas. If
you're not prepared for these costs, they can quickly drain your retirement
fund.
One way to plan for these costs is to enroll in
long-term care insurance. The key is to sign up early, though, because if you
wait until you need long-term care to enroll, you'll either face sky-high rates
or be denied coverage altogether.
Long-term care insurance can be expensive, with
the average 60-year-old couple paying around $3,400 per year in premiums. So you'll have to
decide whether the insurance is worth the hefty price tag or if you're going to
pay for long-term care out of your own pocket. Either way, it's important to
factor these costs into your retirement savings plan so you're not caught off
guard.
There are so many factors to consider when
planning for retirement, and it can easily become overwhelming. But by asking
yourself a few key questions as you're planning, you can gauge whether you're
on the right track to retire comfortably.
The Motley Fool has a disclosure policy.
No comments:
Post a Comment