One of the most common retirement questions people ask is, “Do I have enough money to retire?” What many people don’t realize is that there’s a better question they should be asking, and that is, “Can I support my current lifestyle, and for how long can I support it with what I have saved?”
There is no magic savings amount that will guarantee a worry-free retirement for everyone, but you can prepare well and create a plan that is right for your unique life. Since you need your retirement savings to last as long as you do, calculate your retirement number by asking these three questions.
Creating a budget is a good practice no matter what age you are, but it’s especially important as you draw closer to retirement. Mapping out your expenses and income will help you create a few scenarios to determine when you can retire and what your income will look like at different points in your retirement. This doesn’t mean you have to track every single purchase for the rest of your life, but a budget is an excellent tool to give you an understanding of how much you currently spend on your fixed expenses and discretionary items.
By creating a budget, you can establish a baseline of how much your nest egg will need to be to support your desired lifestyle. Don’t forget to include income sources such as Social Security, pensions, and rental income, as well as potential future expenses, such as healthcare and retirement travel.
Once you know what amount it will take to continue your current lifestyle in retirement, it’s time to take a look at your tax situation. Is all of your money in tax-deferred investments, or do you have a healthy combination of non-qualified, tax-free, and tax-deferred assets to tap into? The types of savings vehicles you have to play a vital role in how you set up distributions and how long your money will last.
Your withdrawal strategy, or lack thereof, is a big deal and can have a major impact on how much of your hard-earned money you ultimately keep. If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement. You need an intentional game plan to make sure everything works together. The last thing you want at this stage of your life is a financial surprise that will result in a lower standard of living. A proper distribution strategy could save you thousands of dollars.
For example, using our current tax landscape, the standard deduction for a married couple filing jointly is $24,000. If you want to minimize taxes, you need to make sure that your money is spread out in different investment vehicles so only a portion of your retirement income is taxed. The goal is to leave enough money in traditional retirement accounts to take a distribution of $24,000 or less per year, then take the rest of your income from Social Security and your tax-free assets, such as a Roth IRA.
Some people work hard to leave money to their loved ones, while others want to spend their last dollar on the day they leave this world. No matter what you choose to do, you need a plan to carry out your wishes. Let me explain. If you plan on spending every penny you have saved but end up living longer than you thought, you will have to reduce your standard of living or find some sort of work. If, on the other hand, you want to pass money down, a plan can help you determine how to effectively make that a reality and save your heirs a headache. That’s another benefit of having a variety of investment vehicles to your name. If you do not need all the funds from your tax-free accounts, they will then be passed down to your heirs with zero tax. Take some time to decide what you want to do with your money, and plan accordingly.
Once you’ve taken these three factors into account, work backward to calculate a ballpark figure of how much you still need to save to confidently retire. If you want a more detailed number, you’ll also need to consider inflation, longevity, market risk, and healthcare costs. Regardless of where you are on the path to retirement, it’s critical to have a personalized plan and number to work toward. I am here to point you in the right direction. For a no-obligation, no-fee conversation about how we can set you up for your ideal retirement, schedule a call and meet me virtually.