Estimating Your Financial Needs for Retirement
As you approach retirement, one of the biggest questions on your mind is likely "Will I have enough money saved?" Many people save for retirement without a clear target in mind, leaving them uncertain if they're on track. The key is to take the time to estimate your potential retirement expenses and income sources. With these projections, you can determine if your current savings rate will sufficiently fund your future needs.
Tally up Your Expenses. The first step is to identify the expenses you'll face in retirement. A good starting point is looking at your current spending. However, keep in mind some expenses will decrease after retiring, while others may increase.
Expenses that could go down include:
Income taxes (depending on your retirement income level)
Mortgage payments or rent (if you downsize to a smaller home)
Utilities for a smaller property
Commuting costs like gas, parking, etc.
Other work-related expenses like clothing and dry cleaning
On the other hand, you may see increases in areas like:
Travel and leisure activities you now have more time for
Healthcare costs not covered by Medicare
Hobbies, dining out, and entertainment
Potential long-term care expenses down the road
Don't forget to account for inflation's impact on future costs as well. A general guideline is you'll need about 80% of your current income in retirement to maintain a similar lifestyle. But this can vary greatly based on your unique situation.
The most accurate approach is to create a detailed retirement budget projecting your estimated monthly expenses. This will give you a much clearer picture of the annual income you'll need.
Calculate Your Income Sources. Next, determine the various income streams you expect to receive in retirement. These main sources typically include:
Social Security benefits
Employer pension
Income from rental properties you own
Withdrawal from retirement accounts (401(k) or IRAs)
For Social Security, there are strategies around when you claim benefits that can impact your monthly payments. Delaying until age 70 results in the maximum benefit amount. Pensions may offer a lump sum or annuity payout option, each with different tax implications.
Run the Numbers. Once you have your projected expenses and income sources, you can do simple math to see if you have a surplus or shortfall. Online retirement calculators can help by running this analysis based on your specific inputs.
Many calculators also use Monte Carlo simulations to model how your portfolio might perform under different market conditions. This stress-testing provides insights into the probability of your savings lasting through your retirement years. If you find you may be falling short, the calculators allow you to adjust variables like your retirement age, spending levels, and asset allocation to get on track. Working with a financial advisor can provide further guidance through more robust planning tools and analyses.
Develop Your Strategy. With a clearer picture of your retirement needs, you can create a comprehensive plan to help achieve your goals. The key is to start estimating your retirement needs as early as possible. This allows you more time and flexibility to make adjustments and properly prepare. With diligent planning, you can increase confidence that your retirement will be financially secure. By taking a proactive approach to estimate your future expenses and income sources, you can determine if you're on track or need to make adjustments. Leverage the expertise of our financial advisors and utilize tools to run analyses based on your specific situation. Contact us today to get started.