Planning for retirement is an important financial consideration that should be initiated as soon as possible. (However, it's never too late to start the process.)
A general rule of thumb recommended by some wealth management professionals is to save enough in your lifetime so that you can live off 80 percent of your pre-retirement income. To achieve this, people in their 30s should have already saved an amount equal to or double their annual salary. Those in their 60s should have a nest egg of at least eight times their annual salary.
For a more concrete retirement savings estimate, you can consider a variety of personal factors, including how long you plan on working, your ideal level of investment risk, the after-tax rate of investment returns, and how you intend on spending your retirement. Some people prefer to save enough so they can travel the world in retirement, while others are more comfortable staying at home close to family. Either way, consider these potential expenses when planning for retirement.
1. Travel
Americans 65 years and older spend around $50,000 per year, according to 2018 data published by the Bureau of Labor Statistics. This encompasses essential costs such as food, health care, and utilities. A 2020 survey conducted by Bankrate, meanwhile, found that the average cost for a summer vacation was nearly $2,000. Naturally, those who intend to travel regularly in retirement may need to save more than those without ambitious travel plans.
A recent Ipsos poll of 1,256 Americans who were at least 50 years old found that 63 percent listed travel as a retirement priority. However, more than half of respondents were concerned they wouldn't travel as much as anticipated due to high costs.
2. Vacation Home
Instead of traveling to several different destinations, some retirees prefer to purchase a vacation home where they can spend weeks or months at a time. Many retirees opt to purchase winter homes in warm-weather states like Florida or Arizona. However, this is becoming less feasible, according to RBC Wealth Management retirement income planning manager Griffin Geisler. "We're seeing fewer people who want the costs of a vacation home, especially as prices have gone down in some markets and no one in the family wants it," said Geisler.
According to the National Association of Realtors, the median price for vacation homes in 2018 was $259,300. Paying a mortgage on a second home can be particularly challenging without sufficient retirement savings, but there are ways to make this a reality without going over budget. One solution is to rent out the vacation property via Airbnb or other home-sharing platforms when not in use. Alternatively, retirees can avoid overspending on vacation homes and instead purchase a mobile or manufactured home. The average 1,000-square-foot mobile home only costs $24,000.
3. Transportation
While retirees don't spend as much per year on transportation as the average American, they still must set aside a relatively substantial amount of money. Americans 65 and older spend an average of $7,270 per year, or $605.83 a month, on transportation. This includes purchasing a vehicle and paying for gas, taking public transit, or visiting family in other states. Retirees can limit their transportation spending by relying solely on public transportation if available. This eliminates expenses such as vehicle repairs, gas, insurance, and license payments.
4. Food
Retirees in the United States spend nearly $8,000 per year on food, including purchases at grocery stores, restaurants, and fast-food chains. Cooking and eating at home more frequently can help retirees save money, as it is more cost-effective than dining out. Moreover, many supermarkets offer senior discounts. Fry's Food Stores, for instance, offers a 10 percent discount on the first Wednesday of every month to customers who are at least 55 years old.
5. Health Expenses
Health expenses typically increase the older a person gets, so it's imperative to factor healthcare costs into any retirement plan. Americans between the ages of 65 and 74 pay an average of $6,711 per year on healthcare costs, and that figure rises to $6,930 for those 75 and older. These costs include medical services and supplies, prescription drugs, and health insurance. While you are working, consider contributing to a health savings account, which has various tax advantages and can receive matching contributions from employers.
Retirees can also take a proactive approach to potentially limiting their healthcare costs by utilizing the SilverSneakers program, which is free for those with qualifying health insurance plans. Membership in the program includes access to more than 16,000 gyms, group exercise classes, social networking via health and wellness events, and online health and fitness resources.
It is important to note that Medicare and Medicare supplemental policies do not cover long term care expenses, so that these costs could interrupt or damage an otherwise well thought out retirement income plan, if they were to come into the picture. Planning to address potential chronic illness costs is a whole separate effort, best done by working with a financial professional trained in the field of long term care.
6. Charity
Americans 65 years and older donate more than $2,600 per year compared to $1,888 per year for the average American. If you have a cause you are passionate about, you might want to consider increasing your annual retirement savings targets. If your ability to give to charities and causes in retirement is exceeded by your desire to give, you can consider leaving funds to the charities in your will.