We are all on a journey towards elderly age, and that journey should be marked by constant attention and concern for how we are going to pay for our golden years. Come on, we all know that this stage of life is not cheap, and that’s why we have to plan how we are going to finance them, not only in the fact of having three dishes of food a day, but also pay the rent and the costs of healthcare. Before we jump into the specifics, let’s consider some fundamental aspects of retirement planning.
Define your retirement goals and aspirations. What kind of lifestyle do you envision during your retirement years? Well, that’s complicated, but some talk about the 1 million milestone, and some others are considering that $800,000 is enough. Well, let’s take that last number and start from there: Is that enough for a nice retirement?
Is $800,000 Enough to Sustain Your Retirement?
You have to start by evaluating various aspects of what it will cost you to live in one place or another. It is not the same to pay rent in, say, Miami, as in Jackson Hole, so you have to think about where it is cheaper to rent or buy a home (which comes with their respective tax costs).
Other aspects to consider are the cost of transportation between one place and another, for example, if you live in a very rural place, and you are going to have to travel to a city about 30 miles or more to receive medical care (or even go to church on Sundays), that is going to impact on your monthly budget.
The cost of living also includes the value of food that, although you may not see it so clearly, the portion of your budget that goes to food varies depending on where you live: you will know that a banana is not worth the same in Southern California as in Maine, and a steak does not cost the same in Texas as in Seattle.
The Costs of Healthcare When Retiring
The upcoming hurdle lies in the realm of computing your retirement funds. This task can prove to be more intricate compared to determining your earnings during your active working years, mainly due to the potential influx of income from various sources. Your retirement income may encompass:
- Social Security benefits
- Pension plans
- Retirement savings
The reassuring aspect is that both Social Security and pension benefits exhibit a consistent nature, with minimal variations from one month to the next. While they might incorporate occasional cost of living adjustments, their relative stability facilitates more straightforward financial planning.
Conversely, navigating retirement savings can be a more formidable challenge, particularly if your reliance is on investment returns. To gain insight into whether you are making headway towards achieving your retirement objectives, you can utilize SmartAsset’s complimentary retirement calculator.
Let’s make a couple or exercises, putting together a bunch of aspects that could affect your retirement
One person living in Knoxville, Tennessee (one of the cheapest cities for retirees), with an annual income of $50,366, saves $350 a month. That individual, who was born in 1988, is thinking of retire at 66. When he/she gets to that age this is the scenario:
- He/she will have about $404,693, but will need $497,770.
- Will be $93,077 short, so the monthly savings should be larger or must wait until the full retirement age, instead of retiring at 66.
A person born in 1985, living in Sarasota, Florida, with an annual income of $65,000, is going to retire at the age of 70 and has saved $400 monthly. When you retire, your annual retirement expenses will be about $42,200. By the day you close your computer for good,
- he/she will have a retirement savings of $477,346.
- It is a surplus of $61,671 above the $415,675 needed to maintain the minimum standard of living.
Now, to calculate how much you need to save each month to reach a retirement savings goal of $800,000 by the age of 66, we’ll consider a few factors, for a person born in 1965:
To determine how much you would need to save each month from the first month you could legally start working and saving to reach a retirement savings goal of $800,000 by the age of 66, we need to consider the following factors:
- The number of years from the first month of work until retirement.
- The annual interest rate on your savings.
- The compounding frequency of your savings (typically monthly).
Assuming you could legally start working at the age of 16 and want to retire at 66, that means you have 50 years to save.
Next, we need to determine an appropriate annual interest rate. This depends on your investment strategy and the expected return on your savings. Let’s assume an annual interest rate of 6%, which is a reasonable estimate for a diversified investment portfolio.
So, you would have needed to save approximately $125.92 per month from the first month you could legally start working in order to reach your retirement savings goal of $800,000 by the age of 66, assuming an annual interest rate of 6%. Keep in mind that this is a simplified calculation and doesn’t take into account factors like inflation or changes in your income over time. It’s always a good idea to consult with a financial advisor for a more detailed retirement savings plan.