6 Factors Affecting How Much Money You’ll Need in Retirement

You’ve been passively saving for retirement your whole career, but how do you know when you’ve saved enough? Learn what factors can increase or decrease your need for income in retirement.

Planning for your retirement, whether it is imminent or years away, requires a series of important financial decisions. Although many of these decisions are speculative, you can make some assumptions based on the past. For example, your family history can give you insight to your expectations for longevity. You can also plan more effectively with advice from financial experts and people who have already retired. The following are some ways to calculate how much money you will need to maintain your lifestyle in retirement.

Leverage the 80% Rule

When it comes to saving for retirement, the commonly accepted rule is that you need a retirement income that equals at least 80% of your final annual working income. If you bring in $100,000 annually pre-retirement, then you need at least $80,000 to maintain a similar lifestyle after you retire.

What if you don’t want to maintain your lifestyle? What if you want to change it and start traveling more? What if you want to devote your retirement to more intense involvement in your favorite expensive hobby? What if you want to stay home and read through your home library?

The 80% rule can be used as a guide, but from there you need to adjust up or down according to your retirement plans. Here is a list of variables you should consider when deciding if 80% is the right amount for your retirement income.

1. Ongoing Healthcare Costs

It is hard to predict your healthcare needs as you get older, but you can start by looking at your current health status, family history, and your lifestyle. If you have a chronic condition, like hypertension or diabetes, you have a baseline for ongoing healthcare costs. Your family history could give you a glimpse into what conditions you might struggle with as you get older.

You can have control over future healthcare costs. Consider adding healthy habits to your lifestyle. Taking care of your body can improve your quality of life and keep your healthcare costs low. Choices you make that affect your health will ultimately affect your finances.

2. Outstanding Home Loan

Paying off your mortgage before you retire will cut down on your monthly expenses. If you plan to retire before your home is fully paid off, you’ll need to plan for that extra expense in your retirement budget.

3. Anticipated Lifestyle Changes

Think about the activities you’ve been saving for your retirement. If you expect to start eating in fancy restaurants and taking lengthy trips, you need to adjust your retirement savings accordingly. People who look forward to finally taking it easy at home after retirement probably won’t need as much money to live on.

4. Financial Support for Children

Where will your children be when you retire? Will they be off on their own or still in school? Is it possible you could take over the financial support of your grandchildren? These are all factors that will affect how much money you need in retirement. It is a good idea to set realistic expectations with your adult children for how much assistance they can rely on from you after you retire.

5. Long-Term Care Needs

It is difficult to predict whether you will eventually live with one of your children or move to an assisted living community. A family history of dementia or other debilitating conditions could point toward the need for potentially expensive geriatric care. If you have long-term care insurance or family support you can count on to take care of you when you need it, you won’t have to budget as much money for this portion of your retirement.

6. Macroeconomic Conditions

Inflation could have a serious impact on how much money you need in retirement. A jump in inflation would drive up the costs of healthcare and food, two important items you will spend money on after you retire. Taxes are another factor that affect your retirement needs. Changes in the tax code could affect how much of your retirement income you get to keep and how much you have to pay to the government.

The amount of money you need in retirement is only an estimate, of course. You won’t know the exact amount until your retirement is over, but you can start to budget now. The best way to figure out how much money you will need in retirement is to begin with the 80% rule. Then, consider the factors listed above and add or subtract appropriately. Your final amount should be somewhere between 65% and 95% of your final annual income. It’s always smart to aim higher with your retirement budget and end up with more savings than you need rather than not having enough saved.

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