How To Estimate and Prepare For Your Retirement Costs

As a worker, it can be pretty challenging to figure out how much money we need to raise for our retirement funds to support ourselves when we reach the golden years. In some areas where the cost of living is pretty low, your expenses will likely decrease.

But, if you’re moving into expensive places and want to spend your life doing leisurely things – like your hobbies or traveling – chances are you’ll be spending more money to fulfill your retirement goals. While we can’t exactly create a financial plan with 100% accuracy, the financial advisors recommend you follow this guide to prepare your retirement funds.

The Study

While this estimation is a reasonable number, most financial advisors emphasized your retirement funds estimation cost has to be aligned with their desired lifestyle.

The researchers conducted a survey on the participants to estimate how much of their pre-retirement salary they would need to continue supporting their lifestyle during retirement. Most of them roughly answered 70% of their income.

The researchers then asked the participants on the types of activities they expect to do when they retire and attached the price tag estimates to those activities.

When they compare the participant’s activities to their income, they found the 70% threshold of their pre-retirement salary isn’t enough to support their lives and enjoy the activities they desire. If anything, they found the participants need at least 130% of their pre-retirement income to live a comfortable life during retirement.

Expectations vs. Reality

To better estimate and balance your estimated retirement funds, the financial advisors recommend you balance out the expectations and reality you’ll face when you retire. According to the Employee Benefit Research Institute, the median household spending drops by 5% for the first two years of retirement.

While 46% of the household spent more money for the first two years of retirement compared to before they left their work or job. The remaining 28% of the household spent more than 120% of their pre-retirement savings for the first two years.

According to the study, most families end up spending less when they retire not just because they have less money but also because they solely depend on Social Security Benefits to fund their retirement.

Around 21% of married couples as well as 44% of single beneficiaries depend on their benefits and pension to sustain their lives during retirement according to the Social Security Administration. The problem is you need to wait a few more years (from age 65-70) before you claim the full potential of your Social Security benefits.

You need to delay your claim and when you’re only relying on Social Security alone, most retirees have no choice but to spend less to make ends meet. That being said, the financial advisors gave these tips to help you retire comfortably while doing the activities you want.

Create a Retirement Budget

You need to list down the expenses as well as the activities you want to do when you retire. Here’s an example of a retirement budget list:

1. Mortgage
2. Utilities (bills)
3. Car loans
4. Travel
5. Hobbies
6. Movies, nights out, etc

As you make your list, you can also add up the expenses and incur for each item in the whole year to see exactly how much money you need to live the lifestyle you’re expecting. Then, compare the estimated cost to your earnings to determine what percentage of your income you need to save for your retirement funds.

Determine If Your Savings Align with Your Budget.

Now that you have an estimated retirement funds cost, you need to determine how much money you need to save (as well as the time) to raise the necessary money. You can do this by using a compound interest calculator. Calculate your total savings per year to determine how it’ll perform over time. You can also input the interest return rate to determine how much you should contribute to save every month or year.

You can use the 4% rule to start withdrawing your savings as you enter the first two years of your retirement. You can adjust the amount or percentage of your withdrawal as you adjust your spending as well as the inflation. In this way, you’ll still have enough money by the time you hit 65 and you start claiming your Social Security benefits too.