“How much money do you need to retire comfortably?” is a great question to be asking. Before answering, however, you also need to consider: “When do I want to retire?” and “Where do I want to retire?”
Question #1: When or At What Age Do I Want to Retire?
Of course, the answers to ‘how much do I need to retire at 50, 55, 62, or 65’ are all different. So, the question may really be, when can I retire? Still, having a dream date or a goal in mind is always a smart move. If you don’t have a specific target date in mind, you might just find yourself floundering about in the workplace grind indefinitely. You may be buying and indulging in “things” to satisfy for the moment, when you should be using that disposable income to prepare for your target date … and to be debt-free when you get there.
Certainly our wants and desires may be limited by the stark reality of what we have available, how frugal we have been over the years, how the economy is doing and so forth. Your target date may have to be altered depending on some of these factors, but have an end date in sight.
For me, I wasn’t sure when I wanted to retire. I always thought I would work as “long as I could.” However, my father retired at the age of 62 and often told me he was very pleased with his decision because it gave him the opportunity to enjoy life while he was still “young” and able to enjoy it.
Questions #2: Where Do I Want to Live When I Retire?
This is another good question, and it should be an important factor in your retirement planning. If you plan to retire in the house you’ve lived for your whole life, chances are that house is paid for and you are debt-free with respect to housing costs (other than taxes and insurance). But what if that house is too big, or you are unable to keep up the maintenance? You might be wanting to consider down-sizing into a condominium or other retirement community living arrangement. There are more and more options available today as the demand is increasing. (For more options to consider, see Best Retirement Places to Live and Independent Living Senior Communities.)
Maybe your kids have all moved away and you want to be close to family. That may require a move, and moving expenses will need to be considered.
Maybe you want to be adventuresome and retire abroad. Be watching for more posts about this in the future as this has been my dream, and I look forward to sharing more about that soon.
Question #3: How Much Money Will I Need to Retire?
We should all be thinking about a good answer to this question, whether we are young, middle-aged or older and on the verge of retirement. We should be prepared. Some of us may still be young, wondering where we are even going to get the money to make retirement possible. Studies consistently show that Americans are increasingly concerned about this topic and worry they won’t have enough money when the time comes. Some of us simply “guess” at what we’ll need, others of us have been working with a financial planner or estate planning professional for years. Where are you?
Honestly, nailing down an exact dollar figure is unrealistic, but getting in the ballpark is well worth the time it will take. Financial advisors are in the business of helping people estimate their retirement needs by looking at expenses, lifestyle, and other factors. One goal that seems to make sense for anyone getting ready to take the retirement plunge is that you enter retirement debt free. So, once you have the debt monster taken care of, you need to start looking seriously at other factors that may be out of your control.
What factors are out of my control? While you can control how much you spend on housing, food, and entertainment, you may not have any control over the high cost of medical care and insurance. Let’s face it, as we age, our bodies start falling apart … some of us faster than others. Even the most in-shape, diet conscious individuals can face medical challenges along the way. The key idea here is that your financial plan is prepared for your “potential” medical needs. Think bigger than you expect because the average couple, retiring at age 65, will spend $285,000 in health care costs alone. If you should progress to the place where you need nursing home care, keep in mind that can deplete a nest egg very quickly. For this reason, many people are looking into long term care insurance. Talk to your financial adviser about the advantages to this coverage.
Your financial adviser should be able to take your expenses and desire for a standard of living and project a monthly budget. From there, you can determine the yearly income you will need to support that lifestyle. Looking at the rates of earnings a given retirement portfolio might afford, together with an estimate of inflation, you’ll be able to come to a retirement goal. With that number in mind, you can determine how much money you will need to be saving and investing on a monthly basis to reach your goal.
These three questions all fit together, and you may need to revisit all three several times before they all mesh realistically. Knowing how much money you really need to retire will help you plan for a successful retirement. Yet, the answers to when I want to retire and where I want to retire are also essential to that plan. Look at all of your answers, and see how they fit together.
Retirement is a step you should not take lightly and one for which you should begin preparing as early as possible. I can’t stress enough how starting to prepare in your 20s and 30s can be one of the smartest things you ever do. It may not be “comfortable”, and you may want to use your disposable income on other more “fun” things, but trust me, the power of compounding interest can work in your favor to make retirement goals attainable at a younger age. Live life to its fullest, and be ready to enjoy the fruits of your labor with a healthy, vibrant and financially sound retirement!
If you have insights to any or all of these questions, I would welcome your comments below. If you have never asked yourself these questions, I’d like to hear from you as well. If you have other questions you’d like to pose to add, please feel free. It will be great to be in conversation with each of you as we all are on different paths, yet we’re all moving forward to retirement.