While many entrepreneurs find satisfaction in owning their business and others simply love their jobs, most do not necessarily want to work for the rest of their lives.
If you are such an entrepreneur, you are not alone. Many look forward to the idea of never having to work again, yet, the concern about whether there will be enough income to survive can’t be overlooked. This leads to the all-important question: How much does one need to save for retirement?
A commonly accepted “truth” is that a person will need roughly 80% of their pre-retirement income in order to maintain their lifestyle in retirement. However, this percentage may differ depending on one’s needs and desires in retirement.
In addressing this question, we have identified five of the top issues one should consider when determining their retirement savings needs as well as the amount of income needed to retire comfortably.
- Retirement age
Many people assume that they will retire later than they actually do, primarily because of health problems or unexpected changes at work. Thinking about it logically, the earlier you retire, the more money you will have to accumulate for it to last throughout your life. As suggested above, it is important to prepare for unanticipated events such as health issues that could force you to retire early.
When trying to “guesstimate” life expectancy, you should consider your family’s health history and longevity, as well as your own health issues. More people are living into their 90s than ever before. Consider the number of years you expect to have a healthy and independent retirement, as compared to years in which you’re not as healthy. Spending changes from the early years of retirement to the later years, with a shift taking place from discretionary spending to health-care related spending. As one lives longer, if they haven’t planned their nest-egg properly, one may become dependent on others.
Healthcare costs have been rising much faster than inflation. As a result, long-term care expenses could materially impact your savings. Are you adequately insured for such a possibility? This is a good time to review not only your current healthcare coverage, but also the amount (if any) of long-term care coverage to identify gaps and roughly calculate what those gaps could cost in the way of additional insurance coverage.
Another important consideration is the lifestyle that you hope to live. Do you want to travel abroad? Are you considering any costly hobbies such as sailing or restoring custom cars? Do you anticipate any adult children, grandchildren, or parents living with you? Will you have (or want) to work part-time in retirement? Do you plan to scale down and move into a smaller house or condo? If so, how much of a windfall will you have from doing so? All of these questions affect the “how much do I need for retirement?” question as it affects the flow of income in and out of the household.
Although inflation has been fairly low for quite some time, you will need to consider how it could affect your retirement. When inflation is on the higher side, it can materially reduce your purchasing power. Will your savings (at least) keep pace with the inflation rate (currently around 2%)?
- Social Security
Finally, how much are you going to rely on Social Security benefits? When did you last receive a report from the Social Security Administration showing your accumulated benefits at early or full retirement ages? Are you concerned that your benefits may eventually decrease due to solvency issues with the Social Security system or threats by Congress to reduce such benefits? On the average, Social Security replaces about 40% of one’s income at retirement. How will the rest of your income be funded?
Once you have considered these factors, you should have a much better idea of your retirement savings needs. While this is an exercise you can certainly engage in on your own, we assist clients with planning and projections and can run multiple scenarios utilizing differing investment rates of return as well as changing other assumptions that may help folks gain a better understanding of how much they will need at retirement. Should you do this on your own, remember to include at least one version with unanticipated (i.e. medical) costs.
Once you have determined your retirement savings goal, considering what you have already saved, you can then determine how much more you need to save each year to achieve your goal. At this point, you can create a plan to reach that goal.
Do you know the various scenario's that could affect your retirement? There is much to consider and it can be confusing. I am ready to help you for a no-cost, no obligation consultation.
Contact us at firstname.lastname@example.org or at 216.831.0733. We are happy to help and ready to start the conversation.