208- What Will Your Retirement Look Like? Defining Your Retirement Destination
When do you want to stop full-time work? Age 50 or age 70? How much income will you need each month to pay your bills? How will you pay for future medical costs? How much Social Security retirement benefit can you count on? Where will you live in retirement? How much of your current income should you save to fund a secure retirement?
There are hundreds of questions like these that you can ask about to secure a long and financially secure retirement. The key is to ask yourself the questions, get answers and work to create a plan to get you where you want to be. In this post, I am going to try to broadly frame for you the key factors that should influence your planning. I will use costs and incomes from today. As you plan, you will need to estimate future amounts.
The Basic Realities
Longevity – How Long You Will Live?
How long will you live in retirement? Well, according to a recent Centers for Disease Control and Prevention report, life expectancy for males age 65 is now 17.8 years and for females age 65, it's 20.4 years. So, if you decide to retire at age 65 you will likely need to have enough money to fund 18 to 20 years of living costs. For younger individuals, this span of time will likely increase as new medical innovations and health breakthroughs occur. In my view, most everyone should plan on living to at least age 90 as they create their retirement plans.
Cost of Essential Living Expenses
How much do you need to pay your basic living expenses? According to the Bureau of Labor Statistics (BLS) latest information for the year 2019, the average living expenses for a household headed by someone age 65 is about $4,185 per month or just over $50,000 per year. These amounts do not consider extensive travel, charitable contributions, or major medical expenditures. If you plan on traveling extensively, making large contributions or if you have chronic medical conditions your outlays will likely be much higher.
As you look at your essential living costs (e.g., housing, food, utilities, basic medical, insurance costs), many people assume that their living costs will drop drastically once they retire. But many financial planning professionals advise potential retirees to plan on spending 70% to 80% of their former income once their time in the workforce comes to an end. The key is to know what you are spending and why. You must control your expenses.
Your Expected Social Security Benefit
As I have written, Social Security Retirement benefits are designed to provide a stream of income that replaces 40% of what a normal worker is earning prior to retirement. If you are lucky enough to be a high earner your benefit will likely produce 20% or less of your pre-retirement earnings. Today, the average Social Security Retirement benefit for an individual reaching full retirement age of 66 in 2021 is $1,543 per the Social Security Administration or $3,086 for a couple assuming they were both the same age and had qualified for the benefits.
Cost of Healthcare
The BLS 2019 Survey stated that the over age 65 households spent $570 per month or $6,840 per year on medical costs. This made up about 14% of the over age 65 budget. If you are like most Americans, health care is expected to be one of your largest expenses in retirement, after housing and transportation costs. But most likely you won't likely have access to employer- or union-sponsored retiree health benefits. So, health care costs will likely consume a larger portion of your retirement budget—and you need to plan for that.
In my reading, I find that the BLS annual spend of $6,840 for medical costs is likely understated. I believe heath care costs will likely grow for future generations of retirees. According to the 2021 Fidelity Investments Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need to have approximately $300,000 saved (after-tax) to cover health care expenses in retirement. This comes to about $15,000 per year for a 20-year expected retirement. This amount will vary depending on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health care—e.g., 401(k), HSA, IRA, or taxable accounts, your tax rates in retirement and your retirement income level. Overall, rising health costs will consume a large part of your retirement budget.
Cost of Travel
The BLS living costs statistics do not include amounts for extensive retirement travel. If you plan on traveling as a major activity you will need to save money to pay it in addition to saving to pay for your expected essential living expenses.
Leaving a Legacy
In addition to travel, you may want to leave a legacy to dependents or charities. This needs to be considered either by setting aside assets to pass on or by budgeting the cost of life insurance policies the proceeds of which will fund the legacies you desire to leave.
Your Retirement Planning Challenge
If you take a quick view of your expected retirement expenses and subtract from them your expected Social Security benefits you will see an estimated shortfall that you need to make up from personal savings and any corporate benefits you build. In our example, your monthly expenses would be $4,185 and your cash income would be $3.086 leaving a cash need of $1,099 or $13,188 per year. It also means that if your retirement plan is to simply have Social Security to pay your living expenses in retirement, you have a major annual shortfall.
While Social Security might end up paying you a decent amount of money in retirement, for many people, it's simply not enough to live on. If you can't see yourself enjoying a comfortable lifestyle on this benefit alone, then you'll need to try to build independent savings, so you have enough money to enjoy your senior years without worry.
Your planning challenge is to take variables discussed above and develop a plan that will let you create the income you will need to fund your essential living expenses and other desired goals for your years in retirement. My advice to you is to work with a financial planning professional to create a holistic plan that takes all the key factors into consideration. A plan can be created at any age with the result of the plan demonstrating to you what you need to do in terms of private savings, expense control and investing. Once your plan is developed, it needs to be updated at least every two to three years to make sure you are on track to reach your goals.
Planning for the time you stop full-time work is a multi-faceted exercise. You need to consider living expenses, corporate pension and 401(k) benefits, private savings, Social Security retirement benefits, health care costs and the desire to leave a legacy.
As the proverb states, the journey of a 1,000 miles begins with the first step. The same can be said of planning for retirement. You need to know the destination you are looking to reach and when you want to get there. Do you want to stop full-time work at age 50, 62 or 75? Do you want to live frugally or travel the world? Do you want to leave a legacy or die as your last check bounces at the bank? These are the questions you need to answer and plan for. The key is that you need to sit down and do the planning. You need to intentionally plan for the outcome you want. If you don’t, your financial story will likely not end as you hoped.
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