One of the trickiest things about planning for retirement is that it’s hard to estimate living costs years in advance. Imagine you’re 30 years old and trying to figure out what retirement might cost you. At this point, you may be 35-40 years from reaching that milestone. How the hell are you supposed to do numbers when we don’t know what inflation has in store for health care, housing, and the other expenses you can deal with?
Plus, you may be too young to have a solid idea of what you want your retirement to look like. could you to think you will be happy spending your last years traveling the world. But as you get older, the idea of staying closer to home may be more appealing.
That’s why retirement planning is a hard thing to do, no question about it. But one assumption you shouldn’t make in the course of retirement planning is that you’ll manage to get by as an older adult on a fraction of the income you’re used to living on. In reality, you should plan to replace most of your income in retirement, no matter what your specific lifestyle is.
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Don’t lower that estimate
Some people assume that when they retire, they’ll be fine living on a third or half of their income. But that is a mistake.
Many of the basic expenses you pay today are bills you are likely to incur in retirement. So, at a minimum, it would be wise to assume that he will need about three-quarters of his current income to survive once he stops working.
In fact, if you already have higher retirement goals that include lots of travel, you can assume you’ll need the same income in your old age. And that will require a good amount of savings. The good news, however, is that if you give yourself enough time to build savings, you could put yourself in a strong position to completely replace your pre-retirement income.
Let’s say you start funding an IRA or 401(k) at age 30 with $500 a month and do so until age 67. That’s the full retirement age for Social Security if you were born in 1960 or later.
If you invest most of your savings in stocks, your investments will most likely generate an average annual return of 8% over those 37 years. That’s actually a bit below the overall market average. And if so, you’ll be looking at a nest egg worth more than $1.2 million.
And speaking of Social Security, don’t forget you’ll have those monthly benefits to look forward to. They won’t be enough to live on, but if you do your best to come up with a strategic statement, they could serve as a generous source of income on top of the money you save.
do your best
Determining your retirement costs decades in advance is extremely difficult. That’s why it pays to err on the side of needing a lot of replacement income. It can be set to replace 85% of your previous earnings just to manage 70% well. But that’s a much better scenario to land on than one that has you strapped for cash because you didn’t save enough.
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