Planning for retirement can be a stressful and overwhelming experience, especially with rising prices due to inflation. According to data from the Natixis Global Retirement Index in 2021, 36 percent of American adults feel they'll never have sufficient money saved to retire, while 59 percent say they'll have to work longer than anticipated. The COVID-19 pandemic has exacerbated economic concerns among Americans, especially relating to government spending and how it might eventually decrease Social Security benefits.
As unfortunate as it might be, there's nothing you can do about government spending and other external factors for financial security. Regardless of economic conditions, you can and should begin planning for retirement as soon as possible, even if it means putting away as little money as you can afford.
To predict how much you may need for a financially comfortable retirement, ask yourself these five questions.
1. What Kind of Lifestyle Do I Want?
Before even thinking about how much money you'll need for retirement, you'll need to consider the kind of lifestyle you're happy with once you stop working. If you intend on living in your current house and still have to pay off your mortgage by your desired retirement age, you'll need to plan accordingly. Conversely, if you plan to downsize and sell the house, you can count that extra income as part of your retirement budget.
Another thing to consider is how you plan to spend your free time. Concluding your work career can be a rewarding experience, but it can easily be tiresome and boring if you don't have day-to-day hobbies or plans to travel. An average trip to Italy, for instance, costs about $2,600 per person. If you intend on traveling several times per year in retirement, you'll need to save appropriately.
Maybe you're someone who won't be completely comfortable not working and instead want to set up a side business or work part-time. If this is your plan, you can probably afford to retire a little earlier than you might otherwise if you stopped working altogether.
2. When Do I Want to Retire?
Knowing when you want to retire is just as important as knowing the type of lifestyle you want. Obviously, if you want to retire relatively early (the average retirement age in the US is 65 for men and 62 for women), you're going to have to save and/or invest more aggressively during your working years. This might mean avoiding otherwise unnecessary spending on travel and leisure. Alternatively, you might want to enjoy a quality lifestyle with plenty of time off for travel and somewhat extravagant spending during your working career.
3. Do I Want to Keep Paying Off Debt in Retirement?
While many people claim it's important to pay off existing debt as soon as possible—and certainly before retirement—there's a case to be made to instead pay yourself first, (i.e., investing in a retirement account or contributing to an emergency fund). Prioritize paying off high-interest credit card and student loan debt, but the math suggests it's more favorable to invest than pay down a 3 or 4% percent mortgage, for instance, since the S&P 500 produces a return of approx.. 7 percent in the long haul, when accounting for inflation. Moreover, if you plan on working in retirement, you may be able to handle debt payments more easily.
"It really comes down to personal preference," notes Kansas-based CFP Desmond Henry. "Mathematically speaking, the best route would be to maximize your retirement savings as much as possible and take advantage of the low-interest rate environment we're in on your debts [like by refinancing]. However, I don't always do things based exclusively on the numbers. There's a psychological and relational aspect to the world of finances . . . [and] I've yet to ever meet anyone who ever regretted paying off all their debt." Having said that, there may also be benefits to using “other people’s money” in retirement ( for a fixed rate mortgage, for example), and maintaining a higher level of liquid assets that can benefit from increases in interest rates over time.
4. How Is My Health?
Looking after your health is an important component of retirement planning. Obviously, unexpected health scares can occur but, generally speaking, if you prioritize your health through physical activity and healthy eating habits, you're more likely to spend less on health care in retirement.
The Fidelity Retiree Health Care Cost Estimate suggests the average American retired couple age 65, as of 2022, would need to have a nest egg of $315,000 (after tax) to pay for healthcare expenses during their retirement years. This includes all necessary medication, surgeries and other treatments, and long-term care. This needed level of funds may be higher on the coasts.
5. What about Annuities?
Like paying off debt, there are positives and negatives to utilizing annuities in retirement. The most common and helpful annuity for retirees is the deferred fixed index annuity with an income rider, which pays the holder monthly income until death via invested funds. Money invested in an annuity grows tax-deferred until payments commence during the income phase. Some fixed index annuities offer increasing income over time, for inflation protection. They also come with guaranteed death benefits so all of the money stays in the family regardless of how long the annuity owner lives.