Expect, on average, to spend 70 to 80 percent of your annual, pre-retirement income when you retire. I know clients who spend more in retirement than they did when they worked full-time. So, the answer differs for everyone. I’ve seen younger retirees with hobbies that cost more than anything they had time for prior to retiring. Retirees often live with very little debt. Their homes are generally paid for, and their children, if they have any, are usually out of college.
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To determine what you should spend in your retirement, build a model. A simple one is okay for starters. There are a number of 401(k) plans that have tools that try to project retirement income. I’m not advocating for a particular plan or tool, but I’ll offer some examples you can explore.
First, look at the U.S. Labor Department’s web site. It offers an income calculator at http://www.dol.gov/ebsa/regs/lifetimeincomecalculator.html. And CNN provides a simple tool at http://money.cnn.com/calculator/retirement/retirement-need/ that allows you to adjust for savings, current income and potential contributions. These tools can help you see the trajectory you’re on.
Once you know how much you need to save, look at your portfolio and make adjustments. For example, many 401(k) plans have a default savings rate of 3 percent for newly enrolled participants. Saving 3 percent likely won’t meet your needs, unless you’re relying on something other than your 401(k) plan. These default settings also include default investment options. Check these, too, because many plans require a participant to opt out of them.
As you near retirement age, consider some not-so-obvious expenses that will arise in retirement. First, think of travel. A lot of retirees talk about visiting different parts of the country or even the world. But if you retire to a place away from your children, expect to start traveling to see them and your grandchildren. It’s nice to think the children and grandchildren will visit you in, say, Florida. But how often can a young family afford to visit you? Your travel budget could grow by 100 percent or more.
Inflation is another not-so-obvious expense for retirees. Calculate the effect of inflation as you build your nest egg. It will give you a sense of what you really have saved. Saving is always a great first step. But saving with a detailed plan in place is the way to prepare for retirement.
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