You may know that if you want to live comfortably in retirement you have to save for it, whether it's through personal investments, company-sponsored retirement savings plans, or both. But what you may not know is how much you need to save. The rule of thumb is that you'll need 70-80 percent of your pre-retirement income on an annual basis. That means if you're making $50,000 when you retire, you'll need an income of at least $35,000-$40,000 every year after you retire. And how will you spend your post-retirement dollars? Well, everyone is different, but consider the following possibilities.
What, Me Worry?
Chances are you'll be spending less after you retire. Work-related expenses, such as commuting costs, work clothes (and dry cleaning them) and buying lunch will be eliminated. You'll be collecting Social Security benefits rather than paying Social Security taxes. If you own a home, your mortgage may well be paid off by then. If you have kids, they're likely to be done with college, so you won't have to deal with tuition payments. You may find yourself in a lower tax bracket after you retire, too. And, since you'll be in retirement, you won't have to save for it as you do now-you'll be managing your investments instead of contributing to them.
Expenses to Expect
While some of your expenses may diminish or disappear, others may grow. Travel and leisure costs can increase substantially. Let's face it: retirees are a vacationing folk – golfing in Myrtle Beach, gambling in Las Vegas – and these little junkets are expensive. More pricey trips are often taken early in retirement when retirees are weaning themselves away from their full-time jobs by taking part-time work, so the high cost of those vacations may be offset by the money that's still coming in…but a month in the Mediterranean is still a month in the Mediterranean.
Unfortunately, health care is also a biggie for retirees. As we age, our bodies weaken – and taking care of them costs real money. Doctor visits here, arthritis medication there...it all adds up. In fact, a 1998 report from the Bureau of Labor Statistics states that households of people over 65 pay 54.3 percent more for healthcare than do households of people under 65.
Expect the Unexpected
The American Association of Retired People (AARP) reports that approximately 50 percent of Americans who reach the age of 85 will eventually need long-term care – an expensive prospect, considering that the cost of living in an assisted living community currently runs anywhere from $1,000 to $3,000 a month and that long-term care insurance premiums for seniors over 65 can range from $2,000 to over $10,000 a year. If you expect to take care of elderly parents or disabled children, you have to make provisions. And you should also be prepared to fund your own care – just in case you need it.
Modify to Get By
Stock investments may be your best bet to amass and maintain a nest egg, but when you're retired, you want to protect that nest egg in case the stock market takes a dive. Move a large portion of your stock holdings into liquid, traditionally low-risk investments. But don't ditch stocks altogether! Short-term market ups and downs are typical, so hold onto a portion of your stock investments for their growth potential – you'll need that in the long run. Look at it this way: You'll need money for a long time, but your money will have a long time to grow.
Knowing how much you'll need in retirement is almost as important as saving for retirement in the first place. So be sure you do the math. And keep this in mind: Your personal situation is just that – personal. Assess your own needs – present and future – to figure out how much money you'll have saved away.
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