Contrary to what many financial planners suggest, some retirees are living on less than they expected while they were preparing for retirement. Nearly three years into retirement, they report living on just 66% of their pre-retirement income on average, or $58,000 annually, according to a survey by investment firm T. Rowe Price.
This is much less than the 80% of pre-retirement income that financial planners suggest setting aside. But 85% of the survey’s 1,507 respondents say they don’t need to spend as much as they did before retirement to be satisfied, and 57% report they live as well or better than when they were working.
Is $58,000 Really Enough Retirement Income? Too Much?
“It [$58,000] doesn’t surprise me,” says Cynthia Petzold, a certified financial planner with CommonWealth Financial Planning LLC in Roanoke, Va. “Each person’s situation is different, but I think that $58,000 is really on target [to cover] basic living expenses.”
But the figure likely doesn’t include special or one-time expenses, such as traveling, house repairs or car replacements, she adds.
The consensus among financial planners is that there isn’t one magic income number that everyone should strive to achieve, but you can determine the amount you and your household will need based on some common indicators.
Consider These Factors
When planning for retirement, you must estimate the amount of money you will need to retire comfortably. That number will depend on a number of factors, which Petzold says includes:
- the amount of money that’s already saved,
- what kind of guaranteed income (Social Security and pensions) you will have
- and how much you are projected to spend.
“At least as important as how much you’ve saved is what your spending pattern is,” Petzold says. “Take a look at what you think your expenditures are going to be like during retirement: basic expenses (utilities, insurance, groceries, car maintenance) and then the special expenses (travel, home renovations, weddings).”
Create a Buffer in Your Savings
Make sure to include those occasional expenses, which can take significant chunks out of your savings if not budgeted for properly.
Home and car repairs, entertainment expenses and rising health care costs are often forgotten about during the planning stages, but these should be added to the $58,000 figure to create a buffer in your budget.
“You don’t want to be in a position post-retirement where something comes up [that can] destroy your retirement plan,” says Jim Cantrell, a certified financial planner with Brookfield, Wisconsin-based Financial Strategies Inc. “You want some buffers in your retirement plan, and one way to do that is to estimate costs on the high side — add in those occasional expenses. If they’re not in the plan, those can be $10,000 to $50,000 that you weren’t expecting and can really damage your retirement plan.”
For example, most retirees tend to replace their car within five to 10 years of retirement, he says. So to plan for that cost down the road, retirees should look at how much it might cost to buy a new or used car and add that into their budget.
Setting a Goal and Meeting It
Being flexible is key to setting and reaching your target retirement income level.
“Once you’re in retirement, then every year take a look at your planned expenditures, your sources of income and adjust your spending depending on what your income is going to be,” Petzold suggests. “Be flexible as you’re thinking about your retirement spending. Sometimes I don’t think people understand that you don’t have to take out the same amount every month.”
Starting out, here are a few things she suggests:
1. Take advantage of online resources. Use retirement calculators to get an overall idea of what your retirement spending and income might look like.
2. Re-evaluate your spending. If the calculators’ projections estimate that you will outlive your savings or earnings, adjust your spending pattern. Where can you cut back? Are there areas in which you can save some money?
3. Consider working longer. Where are you in your career and how much longer do you want to work? If you stop working full time, but won’t have enough in savings to last you through retirement, then picking up a part-time job can help offset some expenses.
4. Work with a Financial Advisor: Finance — even personal finance — is complicated. And, it is not something you can afford to get wrong. If you are concerned about retirement income — then consider consulting with a professional.
Ultimately, finding the right balance between your cash flow and spending patterns, while adjusting for any occasional expenses, is key to living comfortably in your retirement.
“People say financial planning is like a puzzle, but I don’t think that’s true,” Cantrell says. “It’s more like a Rubik’s Cube: All the pieces are interrelated with the other pieces. Anytime you say ‘I’m going to change what I spend on one thing,’ it changes what you spend on everything else.”