Traditional thinking tends to suggest that those planning for retirement will have to replace less of their current income.
Working Americans say they need to replace 67% of their current income for retirement, but only 32% say they’re on course to achieve this goal, according to a study by Transamerica Center for Retirement Studies and Aegon Center for Longevity and Retirement released May 20. In addition, only 21% responded that they are “very confident” they will be able to retire with a lifestyle they consider to be comfortable, while 35% expressed that they were “somewhat confident.”
Some retirement specialists disagree with the notion of honing in on a percentage of current income and even suggest up to a 20% increase for retirement above what you’re currently spending, at least for the “Go-Go” years – the period immediately after you retire. Overall, unexpected expenses, health care costs, spending on travel and entertainment, and rising inflation can potentially lead to the realization that more income may be needed than previously thought.
Things do change when you retire. You may not be spending money on clothes for work or commuting. Perhaps housing costs have gone down if you’ve paid off your mortgage (though, other recent research shows that housing still is among the biggest costs for retirees, making up about one-third of spending for those 65 and older).
If you’re not sure how to go about figuring out what your expenses might look like in retirement, then a good place to start is to track what you are currently spending. Keeping track of expenses on a daily, weekly and monthly basis will go a long way to finding out what you can cut out and if your current spending habits are keeping you off track for retirement readiness.
The thinking here is to sit down on your own or with your spouse and determine your current expenses and if you’ll continue to spend on those items or if they will go away when you retire. This exercise is more of a bottom-up approach as opposed to broadly landing on a specific figure based on a percentage of your preretirement income.
Also think about what you might have to pay for health care. Only 31% of those Americans surveyed by Transamerica and Aegon said they were confident that the health care they needed would be affordable in retirement. Not surprisingly, the research on retiree costs noted above found that 65 and older households spent an average of $6,700 on health care compared to $4,924 for all households.
To help get financially fit for retirement, start or continue to save, create a backup or emergency fund for unexpected financial expenses, and track your spending. If you aren’t already, think about adopting some healthy lifestyle changes that will make an impact on the quality of your life as you age.
Another big step is to get it in writing – your retirement financial strategy, that is. Through our planning process we will work with you to develop a retirement plan to help you meet your financial goals. Just call us to let us know when you want to get started, or if you want to make changes to a plan you already have.
