How Much Money Do I Need in Retirement?

It’s out there, looming like a dense fog on the horizon. You know it’s coming, but you feel powerless to stop it. Your blood pressure rises. Your anxiety spikes. You watch it march closer, but you stand motionless in its path.

What is it?

Retirement.

Have you ever felt that way? I have. I’ve been clueless about my own retirement needs. I’ve worried about my family and my future. And it’s scary.

How can you possibly prepare for retirement when you don’t know how much money you’ll need? Is there any way to be ready for a chapter in your life that may be decades away?

I’ve got good news for you . . . the answer is yes! You can be ready. You can crunch the numbers and find out how much you’ll need. No crystal ball necessary.

Here’s a quick overview of the steps:

  1. Start with a dream—what you want to do in retirement.
  2. Use the R:IQ tool to get a high-level view of your retirement needs.
  3. Use your current budget to create a mock retirement budget.
  4. Subtract current debts (like a mortgage or student loans) you won’t have in retirement.
  5. Add future costs (like health care) you will have in retirement.
  6. Create a plan to work toward this financial goal.
  7. Work closely with a pro to stay on track with your plan.   

Saving for Retirement Starts With a Dream

Now, before you start putting numbers together, ask yourself this: What do I want to do in retirement?

Your answer to that question is your starting point. How much you’ll need in retirement will depend on what you want to do with that chapter of your life. It makes sense, right? Staying close to family won’t cost as much as visiting all seven continents. Starting that new business will cost more money than playing golf twice a week. You get the idea.

Knowing what you want to do in retirement means you have to dream. I know, you’ve been taught to be practical. Logical. Reasonable. And those character traits are good—but you still need to dream.

Specifically, I want you to visualize what you will do when you say goodbye to the workforce. What are you passionate about? How do you want to spend your time when you no longer have to work? What would you do even if nobody paid you for it? That’s your retirement dream.

If you’re married, I want you to dream with your spouse. You don’t need to have identical retirement dreams, but you do need to know each other’s dreams. By dreaming together and getting on the same page, you can then move forward and plan for your future as a couple. If you’re single or newly single, dream with a close friend or family member—someone who will encourage you to pursue those things you’re passionate about.

If you want to make that dream more real, I’d encourage you to create a mood board. This is just a poster board or a collage of pictures, words, quotes and other reminders of your retirement dream—whatever it is. Why? Because keeping your dream in front of you keeps you motivated and on track.

To help you start dreaming, I’ve created an online tool called the R:IQ, or the Retire Inspired Quotient. Based on your retirement dream, the R:IQ will give you a ballpark amount of money that you need to be investing each month between now and when you want to retire. If you’re married, you need to complete the R:IQ together. For singles, the R:IQ will represent your own goal.

Retirement Costs—A General Budget

That rough estimate is a great place to start, but you’re not done planning yet. As you get closer to retirement, you will need to sharpen that number so you know what you will actually need based on your situation at that time.

You may be wondering: How can I possibly know how much I’ll need then? How will I even know what my life will be like? The basic answer is this:  

  • Start with your current budget.  
  • Subtract current costs you won’t pay for in retirement.
  • Add new costs you’ll have in retirement.

That equals how much you’ll need every month in retirement. I know, doing a budget doesn’t sound exciting, but if you do the math, you’ll get a clearer amount to work toward.

Take this sample budget:

Of course, the amounts you pay for things will differ based on where you live, but stay with me.

Look at that budget. In retirement, what will you no longer need to budget money for? Right now, you have a mortgage, credit card debt, and student loan debt. You’re also putting money away for your kids’ college and you’re paying life insurance premiums.

But those costs don’t have to follow you into retirement!

If you pay off your debt (including your home), you won’t have those expenses. At some point, you won’t need life insurance because you’ll have built enough wealth to replace your income if you passed away. And the kids could be out of college by the time you retire, so no need to fund that anymore. When you take out all those costs, that $4,400 monthly budget drops to $2,600.

What’s next? You add the costs you’ll have in retirement. A big potential expense you might have in your golden years is health care, so let’s tackle that first.

Retirement Costs—Health Care and Long-Term Care Insurance

Folks, I’m not going to lie to you. Health care costs in retirement are expensive. You and I both know that. But how expensive? According to Fidelity, a retired couple can expect to pay $275,000 in medical expenses.(1) Yeah. That much. And that doesn’t include the cost of long-term care insurance, which you absolutely need to purchase at age 60. When you factor in those costs, what can you expect to fork over? HVS Financial, a company that specializes in health care cost projections, says the total cost of health care in retirement—including all the out-of-pocket expenses and long-term care insurance—could hit almost $490,000.(2) Before you break down and cry, take a deep breath. Remember, that’s just an estimate. The cost of medical care will depend on your age, where you live, and your overall health.

So, how do you budget for that much money over 20 years? You break it down into small, more manageable chunks.

Let’s say you’re healthy and want to stay that way, so you plan on needing $400,000 for medical costs. How much would that be per year over 20 years? How much would it be per month?

  • $400,000 divided by 20 years = $20,000 per year
  • $20,000 a year divided by 12 months = $1,666 per month

There are lots of ways to trim those costs, but let’s use $1,600 a month as a rough number for now.

Retirement Costs—A Mock Future Budget

Once you know your current budget and some of the things you will add or take away from that budget in retirement, you can put together a mock future budget. For example:

Now, this mock future budget assumes nothing else changes in your current budget. You may want to downsize in retirement, so you might not have HOA fees or the same utility costs. And once the kids leave the nest, you probably won’t be spending $500 in groceries! Some of you spend way less than that already.  

You’ll notice I didn’t add in travel expenses to visit grandkids, costs of a start-up business, or greens fees for daily trips to the golf course. You can make your retirement budget as frugal or as extravagant as you want—you just need to have a plan for what you want to do. You’ll also want to think about other common expenses like birthdays, Christmas and pet care. Once you have those other things in your budget, you’ll have a much clearer idea of the amount of money you’ll need!

Retirement Money—A Plan to Get You There

Once you have a mock retirement budget, you need to work with your spouse or loved ones to create a plan that will help you reach your financial goals by the time you retire. There are some steps you absolutely must take if you want to enjoy the retirement you’re dreaming about.

  1. Get out of debt. Seriously. If you have debt, it’s eating away at your future. Think about how much money you could be investing if you weren’t sending payments to Visa and Sallie Mae every month! Don’t take debt into your retirement years. Get rid of it as soon as you can.
  2. Create and keep a monthly budget. I know, nobody likes the word “budget.” But it’s
    the GPS for your money. By giving every dollar a name, you are taking control of your money. Without that kind of control, you can kiss that retirement dream goodbye.
  3. Invest at least 15% of your income. Notice I said, at least. Once you’re out of debt, you can throw as much extra money toward retirement as your budget allows. Yes, I want you to be able to enjoy the little things, like a vacation. Just make sure the little things don’t become big!
  4. Check your spending habits. When my wife and I started working Dave Ramsey’s 7 Baby Steps, one of the first things we did was create a monthly budget. To do that, we looked at our spending. We discovered that we’d been spending an absurd amount of money on groceries—between $1,200 and $1,400 a month. For two people! Yeah, I know. I was shopping out of habit, not necessity.

    If you’re already on a budget, it’s still a good idea to review your spending to look for ways you can save money. Even if you can shave off $100 of monthly expenses and invest that money instead, you could have an extra $200,000 for retirement, assuming a 10% return. Remember those health care costs? You could pay for part of them by investing an extra $100 a month.

  5. Work with a financial advisor. I know you’ve probably seen a lot of commercials and ads that talk about how easy it is to manage your investing portfolio by yourself. Yes, if you have the right background and nerves of steel, you might be okay on your own.

But I don’t want to risk my financial future by depending on my own knowledge and experience if I know that someone else has a lot more. That’s why I work with a financial advisor. They give me the information and direction I need—and keep me from making decisions based on emotions.

What happens when you follow these steps? You win with money. You put yourself on solid financial ground. You save your money instead of wasting it. You work with pros who know investing inside and out. And when you hit your financial goals, you get to chase your dreams because you know you have the money you need. That’s an amazing feeling.

Your Retirement Budget—Keep Your Eyes on the Prize

I’ve worked with countless clients over the years, and I’ve noticed a trend. People who think long term do better with their retirement planning than those who get caught up in the moment. Even though that fancy boat, that new technology, or that nicer home could be tempting, long-term thinkers choose to focus on their future needs instead of what they want right now.

People, listen up: You can’t live it up like there’s no tomorrow and then expect to live it up tomorrow, too. If you want to reach your financial goal, you have to keep your eyes on the prize. You know what money milestone you want to hit, and you know the steps to get you there. Stay focused, and be intentional with your saving, investing and spending.

Then, when retirement looms closer and closer on the horizon, you can look forward to it with confidence.

If you’re ready to talk with a financial advisor about your retirement accounts, check out a SmartVestor Pro. They’re the folks I trust with my investments. They can give you the information, direction and confidence you need to reach that retirement goal.

There’s no time to lose, so get started today!

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