You know it’s important to plan for your retirement, but where do you begin? How do you turn dreams into tangible actions? One of your first steps should be to estimate how much income you’re going to need to fund your retirement goals and expenses. It’s not an exact science, but with some thought and guidance you can arrive at a pretty good estimate.
Use your current income as a starting point
It's common to estimate annual retirement income as a percentage of your current income. Depending on the source, that target could be anywhere from 60 to 90 percent. It’s simple and there’s some common-sense behind it. After all, your current income sustains your present lifestyle—so taking that income and reducing it by a specific percentage to reflect fewer expenses in retirement should, theoretically, allow you to sustain your current lifestyle.
But it doesn't account for your specific needs and goals. For example, if you plan on extensive travel, you might need 100% (or more) of your current income. It's fine to use a percentage of your current income as a benchmark, but make sure you go through all your current expenses in detail, and really think about how those expenses will change over time as you transition into retirement.
Project your retirement expenses
Your annual income during retirement will need to at least match your retirement expenses. That's why estimating those expenses is a big piece of the retirement planning puzzle. The closer you are to retirement, the easier it should be to determine accurate estimates. To help you get started, the following are some of the most common retirement expenses:
- Food and clothing
- Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs
- Utilities: Gas, electric, water, telephone, TV/entertainment provider
- Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation
- Insurance: Medical, dental, life, disability, long-term care
- Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
- Taxes: Federal and state income tax, capital gains tax
- Debts: Personal loans, business loans, credit card payments
- Education: Children's or grandchildren's college expenses
- Gifts: Charitable and personal
- Savings and investments: Contributions to IRAs, annuities, and other investment accounts
- Recreation: Travel, dining out, hobbies, leisure activities
- Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
- Miscellaneous: Personal grooming, pets, club memberships
Don't forget that your cost of living will go up over time. The average rate of inflation over the past 20 years has been about 2.10% annually.1 And your retirement expenses may change significantly from year to year. For example, you may pay off your mortgage or experience higher costs associated with a health event. To protect against these fluctuations, build a comfortable cushion into your estimates (it's always best to be conservative). Finally, have your Truist Wealth advisor help you with your estimates to make sure they're as accurate and realistic as possible.
Decide when you'll retire
Along with how much income you’ll need each year, you also need to estimate how many years you'll be retired. This will depend partly on when you plan to retire. Maybe you see yourself retiring at age 55 to get the most out of your retirement. And perhaps a booming stock market or a generous early retirement package will make that possible. But you need to make sure you can confidently fund those extra 10+ years. Conversely, the longer you keep working, the more years you’ll have to save and the fewer years of retirement you’ll need to fund.
Estimate your life expectancy
The age at which you retire isn't the only factor that determines how long you'll be retired. The other important consideration is your health and family history of longevity. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you'll likely live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There's no way to predict how long you'll actually live. But with life expectancies on the rise, it's a good idea to plan for a longer life than the statistics project.
Identify your retirement income sources
Once you have an idea of your income needs, your next step is to figure out how prepared you are to meet them. Start with guaranteed income sources. Your employer may offer a traditional pension that pays you a fixed monthly benefits. Most people can also count on Social Security to meet a portion of their income need. To figure out your estimated monthly Social Security benefit, visit the Social Security Administration website (www.ssa.gov) to review your online statement. Other sources of retirement income may include qualified plan assets (e.g., 401k and IRA accounts), annuities, taxable brokerage accounts and other investments. The amount of income you can draw-down from these various sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to continue working part-time during retirement, your job earnings will provide an additional source of income.
Make up any income shortfall
If you're lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you'll come up short? Don't panic—there are probably steps that you can still take to help bridge the gap. Your Truist Wealth advisor can help you figure out the best ways to do that, but here are a few suggestions:
- Try cutting back on current expenses so you have more money to put away for retirement
- Shift your assets to investments that have the potential to substantially outpace inflation (but keep in mind that investments that offer higher potential returns may involve greater risk)
- Scale back on your expectations for retirement so you won't need as much money (maybe rent the beach house for a month each year rather than buying it)
- Work part-time during retirement for extra income
- Consider delaying your retirement for a few years