Setting retirement goals — Getting real about how much money you'll need in retirement

Since the day you started your first “real” job, you’ve probably gotten advice from all kinds of well-meaning people about how to prepare for retirement. With so many different roads to retirement – and so many potential potholes — how do you really know if you’ll have enough to truly enjoy your life after work?

To calculate how much money you’ll need in retirement, try this exercise. Visualize yourself in retirement and break out your anticipated expenses into needs, wants and wishes.

• Your needs are your foundational floor and should include your day-to-day expenses for food, shelter and health care.
• Your wants are your discretionary expenses for things like travel, consumer goods and recreation.
• Your wishes should include your “stretch goals” — these may include things like establishing an endowment for your favorite charity or setting up a trust fund for the grandkids’ education.

How much income will you really need in retirement? One of the first things you can do to find out is to develop a realistic budget. Start with the basics: food, housing, travel and then go from there. You should also take into consideration the things you want to do when you retire and see how you can fit those into your budget too.

If you’re using your current lifestyle to act as a starting point, you’ll need to do the same for your current income. For example, if you earn $100,000 annually from your job, then after taxes, insurance and deductions, your net take-home pay may be about $75,000. That’s the number you’re currently living on and the approximate amount, after income taxes, you’ll need in retirement if you want to keep living the way you do now.

Where you could spend less in retirement

Your lifestyle is going to change when you retire and the differences will affect what you spend each year.

Housing: By the time you’re in retirement, you may have paid off your mortgage, or you might choose to downsize your home, or move to a lower cost area.

Transportation: If you currently commute to work, gas and car maintenance costs may go down, unless you plan on hitting the road with all that free time.

Clothing: Work clothing can be costly. If you spend retirement wearing jeans, dry cleaning and clothing costs may decrease.

Retirement contributions: No more paychecks means no more contributions into your retirement plans, so that expense can be checked off.

Food: If you’re looking forward to more relaxing meals at home, you might be able to trim dining-out expenses.

Where you might spend more in retirement

Housing: This could go either way. Even if you’re fortunate enough to no longer have a mortgage in retirement, you still may be considering buying or renting a vacation property, or even moving to a higher-cost area.

Medical costs: Replacing employer-provided health insurance can be expensive. Medicare doesn’t kick in until you’re age 64 and 8 months, so you’ll need individual coverage if you retire before then. Also factor in dental care, eye care, prescription costs and any supplemental Medicare insurance.

Food: If you’ve compiled a list of 4-star restaurants you’ve been meaning to try, dining-out costs could rise.

Travel: Many retirees use their newfound free time to visit all the places they didn’t have time to see while working. Travel can be costly and needs to be estimated in your spending plan.

Family assistance: If you think you might be providing some financial support to your children or grandchildren, make sure your income can handle it without putting your own financial security at risk.

Other key factors to consider

Due to medical breakthroughs and healthier lifestyles, there is a good chance that you’ll live well beyond your “average life expectancy.” And the longer you live, the more inflation you’ll face. The increases in the cost of goods and services could diminish your savings. Over time, there are other market risks to consider. Some, like market volatility, you cannot avoid. However, by picking a mix of investments that align with your time horizon and risk tolerance, you can help manage the delicate balance between risk and return.

There are a lot of wonderful things to look forward to in retirement. But, it’s important to also consider that things may turn out slightly different than you planned for. You may encounter your job ending before you planned, or increases in health care expenses for you or another family member. Planning ahead can set your mind at ease should you encounter these risks in retirement.

Could less be more?

The key to reaching realistic retirement goals may lie in changing the way you think about retirement. Instead of focusing on how much you want to do and have, maybe think in terms of how little you really need to be content. No one’s suggesting you live a bare-bones existence. But if you’re willing to make a few adjustments in your expectations, you might be surprised by how close you are to accumulating a nest egg that’ll keep you on track for retirement.

Not all retirement savings are the same

At this point you may want to bring in a financial advisor to formulate a plan based on the pros and cons of your various income sources. For example, withdrawals from 401(k)s or Traditional IRAs are fully taxable. On the other hand, qualified withdrawals from Roth plans are paid out to you income tax-free. A well-designed and managed cash value life insurance policy can also potentially be a source of supplemental retirement income.¹ And if you start drawing your Social Security benefit before age 65, you won’t receive your full benefit. To maximize your income stream over the length of retirement (which could be over 30 years), you may want to think about adjusting some of your savings strategies today.

Keeping it real

One way to estimate if you’re currently on track to be able to fund your needs, wants and wishes in retirement is to use our Orange Money tool – check it out.

After running the numbers, are you on track or coming up a little short? Two quick steps that can make a meaningful difference are to adjust your savings rate and make sure your assets are properly invested. If you’re flexible with today’s “must-haves” and can adjust your savings rate, you may find that you can actually pull off a comfortable retirement by reallocating your cash flow and diversifying your investments.

¹ Subject to the terms of the policy, cash values from a life insurance policy may be withdrawn income tax free up to the policy's tax basis and additional cash values may be distributed through policy loans. Policy loans and partial withdrawals may vary by state, generate an income tax liability, reduce available surrender value and death benefits or cause the policy to lapse.