Let’s first take a look at general guidelines, and then we’ll look at the ways each person needs to personalize retirement planning to fit their unique situations.
Everyone can begin their retirement calculations from a few basic rules of thumb and then personalize from there. The following guidelines can help you get a rough, generalized estimate of what you’ll need for a successful retirement.
In making your calculations about how much you’ll need to retire, most experts recommend that you save enough to replace 60% to 80% of your pre-retirement income over an expanded number of years—30 years, for instance. The reason you may not need as much income in your retirement years is that you will no longer be paying payroll taxes, you’ll probably be in a lower tax bracket, and you won’t have to set aside a portion of your income for retirement.1
Also, many people find that they spend less because they’re not incurring costs associated with work, but this is one of those areas you’ll need to consider when you think about personalization. If you plan on downsizing your home or moving to a less expensive locale, your replacement rate will be lower as well.
According to the Center for Retirement Research at Boston College, households should plan to get between ¼ and ½ of their retirement income from retirement savings plans in addition to Social Security benefits. Researchers found that in order to meet this goal the typical household needs to save about 15 percent of their earnings.2
Remember that 15 percent is an average figure, and if you didn’t start saving at the beginning of your career, you’ll likely need to increase your percentage. Again, it’s important to personalize your retirement savings plan, but you can compare your current savings rate against this average to get an idea of how you’re doing.
As you read about the standard replacement rates and the 15 percent per year recommendations, you probably thought of some reasons why those rules of thumb aren’t perfect for you. That’s good. That means you already know that your retirement planning needs to be personalized to your unique situation.
As you think about how your life is different from “average,” consider the following areas in which you may need to personalize:
What do you think of when you consider retirement? Do you want to travel? Take up a new hobby? Do you think you’ll mostly stay at home and enjoy a slower pace? If you want your goals to become reality, you’ll need to plan for them. Some of your goals may require additional funds, and if so, make sure that you account for those additional funds in your planning.
Some people know ahead of time that they’ll face expensive health issues during their retirement years. If this is the case for you, you owe it to yourself to prepare financially to face your future challenges. Even if you’ve always been healthy, it’s wise to be prepared for unknown future health challenges. You can do this in several ways. First, you can save money for future health costs to help ensure that you can have access to the treatments you may need. Second, you can take care of yourself now. Adopting a healthy lifestyle during your working years can help reduce stress and financial strain during your retirement years.3
Family situations can vary widely, and it’s wise to examine your own family situation and think about how it will impact your retirement. For example, a married couple with a disabled adult son or daughter needs to make much different retirement plans than a single person with no dependents. Families change over the years, and you may need to make adjustments to your retirement plans. Your financial advisor can help you through these adjustments.
Our Wealth Managers would be happy to help you with questions about your own retirement planning and to help you discover your own, personal retirement plan. Call us at 1-800-541-7774 or contact us here.
Sources:
1. Kiplinger
2. Center for Retirement Research