Retirement planning has some often quoted rules of thumb concerning how much money you need to retire comfortably. “You will need 80% of your current income in retirement” for example. The rules of thumb provide general guidance, but they don’t ensure that you will have saved enough for the kind of retirement you want. So when is the time you need to get more specific about your plans?
Where the Rules Fail
The general rules are based on some big assumptions.
The first is that you are looking to have an equivalent lifestyle. That is, what you do in retirement will be exactly like what you did before retirement. Only now, you will do it for an additional 40-plus hours per week all without spending any more than you spent while working. You may also have additional expenses like health insurance premiums and long term care expenses you have not previously had to worry about.
Many also plan on traveling more in retirement than they did while working.
Now the “equivalent lifestyle” is the same thing as before, but likely with more expenses related to travel, new hobbies, increased health care costs and potential long term care expenses. It seems that we have lost many aspects of “equivalent.”
Since you have passed that early life stage and are well established, you may have an idea of what you want in retirement — at least conceptually. If you love to travel (especially high-end travel), the rules of thumb may well leave your projections short. Replacing 80 percent of your not-able-to-travel-as-much-as you’d-like income won’t afford you travel. But you can still make it simple. Save for the 80 percent, plus travel, and throw in a bit extra for the uncertainty of medical expenses.
If retirement is on your visible horizon — say within the next 10 years — it’s time to get specific.
Doing the Math for Your Retirement Planning
Take your income, subtract your income taxes, and subtract your savings. This is what you really live on.
This is your lifestyle, the equivalent of which you may be looking to keep (plus or minus).
You may be able to subtract a couple of other things as well, but only do so if they’re significant. Some expenses, such as work clothes or commuting expenses, will not continue. You still need clothes, but perhaps the budget won’t be the same.
You also have a few things to add, like additional money for health insurance, in most cases. Maybe you are one of the few who will have some great coverage throughout retirement, but most won’t.
You will need to add in the cost of the things you want to do in retirement to the extent that you are not already doing them. If you are doing all the travel you want, that’s in the equivalent number. If you want to travel more, you need to add in the amount of the increase.
Also consider other expenses aside from travel. Travel is both a big expense and a common one, but maybe you plan on learning to fly or joining a country club. Whatever it is, that’s fine — just include the cost in your calculations.
Then there is long-term care. This is an area that needs specific discussion. If you need care without long term care insurance or a plan to self-insure, paying for care can create a financial hardship.
Once you’ve finished your add-ins and take-outs, you need to add your amount for taxes. How much to add will depend on your sources of income and the size of your retirement need.
After you determine what you need to live on, you will need to think about what you want to leave for your loved ones, if that’s one of your goals. For some people it doesn’t matter, while for others it’s non-negotiable. If you have a goal here, add it in.
After you do all that math, you will find out whether or not that rule of thumb was a reasonable estimate.
If retirement is on the visible horizon, you can do the math, or ask an advisor to help. But a rule of thumb will not provide you any reasonable assurance of affording your retirement objectives.
The Bottom Line
As retirement begins to loom on the horizon, it becomes necessary to get into the details. What you want in retirement does drive your saving needs. If you don’t want much, your chances of being okay with a rule of thumb are better than if you have detailed plans. If you have an idea of what you want your retirement to look like and your current vision is important to you, it behooves you to dig into the details. Either you plan so that you can afford your desired lifestyle in retirement, or your savings will dictate what you can afford. If your retirement lifestyle is important, you need to get down to specifics.