You may be worried that you have not saved enough for retirement. And the first piece of advice from most financial experts is to tell you to save more! However, there is something much more effective you can do to make sure that you have enough money to live on in retirement.For a secure retirement, first and foremost, you should consider how much you are going to spend!
Why is Worrying About How Much I Need to Save Misguided?
People who are young and diligent about saving may want to think about how much they will need to save: They have the time and wherewithal to achieve their goal. And, saving as much as possible for retirement is never a bad thing, no matter how old you are.
For those of us closer to retirement–or even those who have already retired–it is probably a little too late to focus on how much we need to save. So what is the secret?
The Secret for a Secure Retirement
The best thing to focus on now, in order to guarantee a secure retirement, is to plan for and control our future spending. Figure out how much will you spend in retirement. Then, stick to that number.
Figuring out how much you can spend–and figuring out how much you need to save–are really two different answers to the same question. There are at least four ways to say this:
- If you save more, you are able to spend more.
- If you spend more, you need more income and savings.
- If you save less, then you have less to spend.
- If you spend less, you don’t need as much in savings.
Simple Math
Simple math for retirement planning is pretty straightforward. The equations above leave out the potentially dramatic impact of inflation and investment returns. But, they can give you an idea of how to think about retirement planning:
How Much You Need in Savings
If you want to know how much you need in savings, you can:
- Figure out how much you want to spend every year.
- Multiply that by the number of years you will live and add potential total out of pocket medical expenses.
- Next, subtract your total income for that time and the remainder is how much you need in savings.
How Much Can You Spend in Retirement
Or, if you want to know how much you can spend every year, you can:
- Start with the savings you know you will have.
- Add your projected total income from all projected years in retirement and then
- Divide that amount by the number of years you will live in retirement.
A good retirement calculator can help you with these equations and even offer much more sophisticated projections.
The NewRetirement Retirement Planneris an easy to use tool that puts you in the driver’s seat for all of the inputs.
This tool is really great no matter if you are trying to figure out how much you need or how much you can spend. This planner is one of the few tools that enables you to set different levels of spending and income for different phases of retirement. You can even set your own projections for optimistic and pessimistic rates of inflation and much more.
For a much more basic analysis, use the simple retirement calculator.
Tips for Spending Less
Cutting out your daily latte or cutting down on travel might be smart things to do. However, there are some much more effective ways to cut retirement expenses.
Reconsider Housing Options
If you are renting or still paying off a mortgage, housing is probably your costliest expense. There are a lot of ways to minimize how much you spend. Best of all, some of these options will also increase your income or liquid assets:
The NewRetirement Planner lets you model different housing options at different phases of your retirement. Housing is a huge lever for securing your retirement. Reducing this expense or releasing some of your equity can have a very big impact on your ability to feel secure.
Evaluate Transportation Costs
Transportation costs can represent a bigger percentage of expenditures, sometimes even more than healthcare. According to the Bureau of Labor Statistics (BLS), in 2016, older households spent $8,002 on transportation, ranging from a high of $9,321 for the 55 to 64 age group to a low of $5,091 for the 75-and-older age group.
Live Somewhere with a Temperate Climate
Heating and cooling can be expensive. Utility bills can be expensive–especially in the heat of summer and the worst of winter. Living in a more temperate area means less of a demand on one of the most expensive systems in any home: the HVAC unit.
Retire Debt Before You Retire
Before retirement arrives, the less debt you have the better. Paying off debt entirely isn’t possible for everyone, but the less you owe the more you have to spend on current needs.
The NewRetirement Planner will let you see what happens to your finances with and without debt. It can be pretty interesting to model your own situations and experiment with different debt repayment plans.
Consider Taxes
Retirees often experience lower taxes in retirement because they typically make less money than they did during their working years. Even though taxes decrease the closer you get to retirement, it is still an expense you will want to minimize. PlannerPlus subscribers can see annual estimates for federal, state, and capital gains taxes, review annual taxable income as well as realized capital gains, and specify itemized deductions and property taxes.
Stay Healthy and Make Good Insurance Choices
Some retirees spend more in their lifetime on out of pocket healthcare costs than they earn in Social Security. You can do a lot to cut those costs by staying healthy and by choosing Supplemental Medicare Coverage carefully. Shopping around for the best supplemental Medicare plan should be done every year.
Plan for Different Retirement Phases
Your spending in retirement will likely evolve over time. Many experts are now advising clients to plan for slightly higher spending when you retire, and then a tapering down of those expenses over time. The Budgeter in the NewRetirement Planner enables you to predict expenses by category and vary your expenditure over time.
Knowing how much you will spend in retirement can save you from financial disaster. Let the NewRetirement Planner help you figure out a secure path to the future you want.
