You may have heard that you’ll need 70 to 80 percent of your pre-retirement income to live comfortably once you leave the workforce. But financial experts advise against adhering to that advice. “I think it’s a terrible rule of thumb,” says Brad Owen, senior wealth advisor and senior vice president at financial firm EP Wealth Advisors in San Diego. “We never use a percentage.”
Wealthy individuals may be able to live on far less than 70 percent of their pre-retirement income. Meanwhile, others may find their expenses actually go up in retirement if they buy a second home or travel extensively. “I think a target number can be helpful, but it shouldn’t be definitive,” says Jo Anna M. Fellon, a CPA and partner in tax services at accounting firm Friedman LLP in New York City. Rather than rely on a percentage, financial planners say pre-retirees need to understand how their spending needs will change over time and plan accordingly. Read on to learn more about how much money you’ll need to maintain your standard of living in retirement.
[See: How to Save $1 Million by Retirement.]
Expenses to factor into your retirement savings plan. For most people, costs will change after retirement. Most notably, income taxes are often reduced as earned income is replaced by pensions and withdrawals from retirement accounts that may be tax-free. Plus, costs associated with commuting and the need for work clothing or professional dues may also be eliminated in retirement.
Other expenses such as mortgage payments, groceries and utilities could stay the same in retirement. James C. Kelly, vice president and wealth strategist with financial firm PNC Wealth Management, tells his clients not to expect a reduction in the cost of their daily living simply because they’ve retired.
And then there are added costs associated with retirement, including increased medical bills. “The challenge we see is that when you first retire, you may have other expenses that are higher,” says Neil Krishnaswamy, a certified financial planner with Exencial Wealth Advisors in Frisco, Texas. Travel is a common increased expense for retirees, but they may also spend more on entertainment, dining out and hobbies such as golf and photography.
Retirement costs change over time. The increased expenses that may occur immediately after retiring are reflected in the concept of a “retirement spending smile.” Coined by certified financial planner David Blanchett, the term refers to how expenses may be higher during early retirement and then lower or flatten during the middle of retirement before increasing again.
“Buying a massive house when you’re about to be an empty nester doesn’t always make sense,” Kelly says. Yet, some retirees may do just that in order to have a space for the grandkids or to fill a lifelong dream of living in a specific type of house or location. Others may renovate their home, buy an expensive car or take an extended vacation. All of these costs can offset any savings realized from lower taxes or eliminated work expenses.
[See: 10 Ways to Gradually Retire.]
By middle retirement, people have often settled into a routine. After an initial spurt of travel, they may be staying closer to home. Retirees in their 70s may also have paid off their mortgages and other loans, resulting in lowered expenses. “We still model that they are getting a 3 percent raise each year to build a cushion,” Owen says. While retirees might not need the extra money each year, by including these costs in a retirement plan, it helps ensure money is available later when expenses might rise again.
Long-term care is one of the most common late retirement expenses. The federal Administration on Aging says the national average cost of care ranged from $20.50 per hour for in-home care to $7,698 per month for a private nursing home room in 2016. Since Medicare will not pay for ongoing custodial care of this nature, retirees could find their expenses rising dramatically in their final years if they have to cover these costs out of pocket. Buying long-term care insurance or using tools such as reverse mortgages or annuities are also options to cover the cost of care.
Consider seeking out professional help. Fellon says she finds clients can become very anxious about discussing their money needs in retirement. However, this conversation doesn’t have to be a stressful. “It really has to do with the retiree’s goals,” Fellon says. An experienced professional can help craft a plan to meet those goals or help people adjust expectations should they have a shortfall in their anticipated income.
“What you’re earning before retirement is almost irrelevant,” Krishnaswamy says. What’s most important is how much you’re saving and how you’d like to spend that money during your later years. Meeting with a trusted advisor early can help on both fronts. Those who are planning for retirement at least 10 years in advance should have time to change their savings and spending strategies in order to meet future goals.
[See: 10 Costs to Include in Your Retirement Budget.]
When it comes to planning for retirement, while it would be beneficial to have a straightforward formula for saving enough money to cover a certain percentage of current expenses, it’s not that simple. Fluctuating costs in retirement, such as health care, travel and housing expenses, mean a one-size-fits-all strategy won’t work for many people.
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