How to Financially Prepare for Retirement
Friday, February 14, 2020, 6:00 AM | Leave Comment
The average American retirement lasts around twenty years. For most of us, that represents about 16% of our lives.
That’s a significant chunk of time not to put some thought into planning how you’ll make ends meet.
But, unfortunately, financial stability during retirement is something many don’t think about until they get older.
And often latecomers have to lower their standard of living to get by with what they have. But regardless of your current age, it’s never too late to save for retirement.
Here are some basic steps to prepare for financial success during your golden years.
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Calculate Your Retirement Expenses
Planning for retirement requires three basic budgeting steps:
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Calculate your expenses
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Estimate your income
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Make up any shortfalls
It’s simple in concept but difficult in execution. Determining your retirement expenses takes some research, time investment, and a little guesswork. You have to ask some important questions. Where will you live? Do you want to travel? Will you still have debt? These are major factors that affect the cost of your post-work lifestyle. Here are several expenses retirees often overlook. Consider them when estimating your cost for funding your retirement lifestyle.
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Final Expenses
It’s not pleasant to think about, but we’ll all need burial expenses at one point. And funerals run around $8,000 on the low end. That’s a cost you don’t want your loved ones to bear. So, add the cost of burial insurance as a line item expense. Burial plans are relatively inexpensive investments, especially when taken out early. Many people choose a guaranteed issue policy, but they could actually save money with a different type. And it’s still possible to get a burial policy even if you have pre-existing conditions.
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Renting vs. Buying Your Home
Locking in a mortgage rate now is a good way to estimate your home costs when you retire. But even if you’ve paid off your mortgage by retirement, you still need to allow for property taxes, insurance, and upkeep. And remember, your homeowner costs will likely shift as you get older. For example, you may be cutting your own lawn now, but later lawn care may be undesirable or impossible. Or a two-bedroom home that is comfortable now may be too snug if filled with a hospital bed and supplies.
Renting offers retirees a fixed monthly cost without the burden of home maintenance. But what you pay will depend on the size of the home or apartment you need and where you’re living. Be sure to research rental properties in the desired area. To estimate your costs, look for home sale projections and current average rent. Typically, the more supply of homes available, the lower the rent.
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Rising Health Care Costs
For most of us, health care costs increase with age. Not only do we need more checkups and procedures as we get older, but the cost of health care rises each year. Medicare A or B plans will cover most of your hospitalization and routine health care costs. But neither plan pays for long-term care, dental, eye exams, or hearing aids. That’s where Medicare supplemental health plans help curb costs. And a supplemental plan’s costs are more predictable, something you want on a fixed income.
You may also want to figure the cost of long-term care insurance into your retirement budget. Most of us will need help bathing, dressing, and eating at some point. Long-term policies protect your savings while getting you custodial care at home. And, like all health insurance, the younger you get in, the lower the premiums.
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Estimate Your Retirement Income
After you calculate all your retirement costs, add up your annual income. And, like any budgeting strategy, estimate income low and expenses high. If your numbers are in the ballpark with no shortfalls, then you’re on the right track to retirement security. As a general rule, you’ll need between 70% to 90% of your pre-retirement income to maintain the same standard of living as when you stopped working. So, if you’re making $100,000 per year right before retirement, shoot for an annual income of around $80,000.
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Retirement Benefits
Use the government’s retirement estimator to determine your monthly Social Security benefit amount. The estimator will factor in a cost-of-living increase for you. But be warned: benefit estimates are based on the current law. And as any good retirement investment advisor will tell you, don’t rely on Social Security to see you through retirement. You need a strong retirement and investment portfolio to supplement your income to maintain the same or similar lifestyle. Next, add in any other retirement investment plans like employer pensions, IRAs, 401(k), or 403(b)s.
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Savings and Investments
Add in any future income from your savings and investment assets. Do you plan on selling your home and renting? Then add in the estimated sale price to your savings. And consider any projected (or actual) cash savings along with any annual interest. Traditional investment wisdom says to plan on spending around 4% of your retirement assets each year. That 4% annual spend should get you through your entire lifespan. So, if you have $1,000,000 in investments, you should spend around $40,000 of it each year. But this is just an estimate, and individual situations will vary. As stated, build in a cushion by factoring in surprise expenses like higher medical expenses.
The final step in preparing for financial success in retirement is to make up for any shortfalls you predict. Even if you’re only a few years away from retirement, it’s never too late to make up the deficit. If you can’t, then at least you have the option to scale back your lifestyle and lower your expectations. It may be the less desirable approach, but at least it’s easy to control. Just don’t needlessly create a shortfall by dipping into your savings for non-emergencies. Be militant about your savings; resist the urge to spend. Consistency in your contributions and discipline in your spending is the right attitude for financial retirement success.
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