How much is enough? Before you can create an effective plan
to save for your retirement, you have to have a reasonably
good estimate of how much you need to save--not just to sustain
your lifestyle during retirement, but also to cover the anticipated
extra costs to fund your dreams.
Moreover, effective planning is the key to preparing for
threats like inflation that can jeopardize your retirement
Below, MsMoney.com will help you:
- Determine your goals for retirement.
- Accurately estimate how much you will need to save to
meet these goals.
- Evaluate if your current savings will be enough to reach
- Suggest changes, if necessary, that you may want to consider.
Since your personal goals for retirement will determine the
shape and size of your financial goals for retirement, its
imperative to establish these personal goals as clearly as
possible, as well as to understand how they translate into
your financial plan for retirement.
If youve never sat down and committed your retirement
goals to paper, now is the time. Read our general discussion
about determining Financial
Goals in MsMoney.com's section on Financial Health.
Important Questions to Ask
Creating a financial plan for retirement goals is difficult
to determine with great accuracy, in part because these goals
may lay up to 50 years in the future. Your assumptions, goals,
hopes, and expectations, as well as rates of inflation and
your returns on investments are far from certain.
Below is a list of the kinds of questions you should consider
to get a realistic idea of what you will need during retirement.
The list may seem endless, but each of these factors will
have an impact on your current savings:
- Age at which you want to retire (either completely or
- The kind of lifestyle youd like to live while
- Where youd like to live during retirement
- Whom you will live with
- Spouses retirement goals and dreams
- Estimated expenses during retirement
- Large expenditures that you plan to make, such as travel
- Whether youll work during retirement
- How long you think youll live
- How quickly you think inflation will grow
- Your estimates for what return you will get on your
- How much of a financial cushion you want to leave yourself
in case of unforeseen problems/calamities
- If you will own your home
- How much money youd like to leave behind after
Estimating Your Expenses During Retirement
Your living expenses after you retire are one element of
your financial goals that can be estimated fairly accurately.
To help estimate your expenses during retirement, think about
your needs in the following stages of your retirement: early,
middle, and late.
- Keep in mind you may need more money in the early years
- Typically, newly retired persons spend more money than
those that have been retired for a few years due to travel,
recreation, or care for elderly parents.
- The second and usually longest phase of retirement is
a time in which you (and your spouse) have "settled
- During these years, you may consider issues such as relocation
and decreasing your spending.
- Budgeting becomes more important.
- Medical expenses can be quite large.
- Underestimating your expenses in this third phase of retirement
is a common mistake.
The rule of thumb for professional retirement planners is
that most people will need 70-90% of the income they were
receiving before they retired to maintain the same standard
Obviously, a lot of factors--where you live, what you want
to do--nfluence this figure. For example, for most of us,
rent or mortgage payments consume between 15-35% of our gross
incomes. Remove this expense, and the monthly income you need
in retirement falls.
Are You Saving Enough?
Even if you havent started saving for your retirement,
you have some retirement assets. The difference between the
financial resources you want to have and what you already
have is the gap youre trying to fill.
Where do these funds come from?
- Social Security
- Other defined benefit plans like pensions
- Existing savings
- Possible inheritance
You can learn more about Social
Security and Pensions and estimate how much money you
are likely to receive from them.
for Retirement Tool takes into account what you already
have (such as Social Security) and your retirement goals to:
- Evaluate whether or not your current savings will be enough
to reach your goals
- Calculate the changes (if any) you will need to make in
your savings to meet your retirement goals.
The Effects of Inflation on Your Retirement
The value of
$100,000 over time
with 4% annual
Inflation is the increase in the cost of living, expressed
as a percentage increase over the previous year's prices.
This sounds harmless enough and happens slowly enough that
we usually cant perceive it happening.
However, inflation is probably the single biggest
threat to meeting your retirement goals.
Even very small changes in the inflation rate can make a
significant difference in the amount of money you will need
to pay for your living expenses during retirement.
A little inflation is normal. In recent years, the annual
inflation rate has been in the 2-4% range. But even these
small percentages (much less than the 10-12% that the United
States experienced in the late 1970s) can change prices dramatically
over the years because prices grow like a compounding investment.
How will this level of inflation affect your retirement financial
planning? It depends on the type of retirement account
- For Social Security, pensions, and other defined benefit
plans, inflation has little or no effect because their benefits
increase with the cost of living.
- For other types of retirement accounts--401(k)s, IRAs,
real estate, bonds, etc.--inflation effectively erodes the
return you get on your investment. If you get a 6% return
and theres a 4% rate of inflation, your real return
is only 2%.
To gauge the effect that taxes inflation will have on your retirement
savings, use this How will taxes and Infational Impact My Savings Over Time Tool.