Key takeaways
- Funding your dream retirement lifestyle requires planning, and the earlier you start, the better.
- Use online retirement income calculators to estimate how much income and savings you’ll need.
- Adjust your investment mix in retirement plans to gradually reduce risk as retirement nears.
- Take care of yourself—physically and mentally—to help lower retirement health care expenses.
Planning for retirement involves so many questions—and so much research—that it can seem like, well, work. You need to figure out what you’ve saved in addition to any pension you anticipate receiving, as well as how much more you could realistically sock away by the time you’re ready to retire.
But that’s only part of the equation. You’ll also have to think about where you expect to live, then factor in tax liabilities, medical insurance and expenses, long-term health costs and general lifestyle expenses.
To get you started, we asked financial experts to share four important steps you can take now so you’ll feel confident about your retirement—even if retirement is decades away.
1. Define the retirement lifestyle you want
Before you even focus on savings, you first must carefully contemplate what lifestyle you want to lead in retirement. Some people envision endless travel adventures abroad. Others dream of moving to warmer climes such as Arizona or Florida.
Even “the simple life” can come with expenses, whether it’s indulging in a hobby (such as golf, gardening or sailing) or frequently traveling to visit the grandkids halfway across the country.
“Spend time on what your actual vision is,” says retirement coach Todd Tresidder, author of the bestseller How Much Money Do I Need to Retire? “There’s a big difference between living the life of luxury and taking a camper to go fly-fishing.”
Nail down what you want and estimate how much it’ll take to support it—the same way you budget your current salary and expenses.
Another important decision: Do you plan to retire completely or keep working part time? Many retired teachers stay active as substitutes, tutors and curriculum consultants. If you taught a marketable skill, such as photography or carpentry, you might be able to turn that into a freelance-type business.
Many opt for the semi-retired life to keep active and to pay the bills. “When you stay active in some capacity, then the idea of retiring five or 10 years or earlier than you would have otherwise becomes more realistic,” Tresidder says.
Continued employment benefits the body, too. Those who maintain some kind of work after finishing their full-time careers are less likely to encounter major diseases and/or disabilities compared with those who don’t, according to research from the University of Maryland.
Another study, from the Hadassah Hospital Mount Scopus in Jerusalem, linked increased longevity with working after retirement.
2. Crunch the numbers
Once you’ve mapped out how you’re going to live and come up with a realistic budget, you’ll need to figure out how much monthly income you’ll need to pay for everything.
List your expected pension benefits, Social Security benefits, and any other source of revenue such as part-time work or rental income. Compare all known sources of income with your projected expenses. Any income shortfall will have to come from your personal savings.
There are plenty of retirement calculators online that can help estimate future income needs. The NEA Income Retirement Calculator, for example, even has state pension data available so you can include it in your income projections.
“Doing this puts real numbers behind the various ‘what if?’ scenarios that affect retirement security, such as ‘What if I sell my home and downsize?’ or ‘What if I work 10 years into retirement?’ or ‘What if I purchase rental real estate instead of stock?’” Tresidder says.
For the most realistic calculations, include inflation as a variable. “Historic annual inflation has ranged between 1% and 4% over the last two decades,” says Thomas J. Duffy, a certified financial planner and principal with Jersey Shore Financial Advisors LLC. “At 3.5% inflation, annual expenses will just about double within 20 years.”
With people living longer than they used to, it’s wise to err on the side of being conservative when estimating what you can afford to withdraw from your retirement accounts. Many experts advise that you should take out no more than 4% a year to avoid depleting your savings later in life. Remember, you’ll owe income taxes on any money you withdraw from retirement accounts, unless you’re withdrawing from a Roth IRA. That’s yet another expense in your budget.
3. Adjust your investment mix as you age
Investment experts traditionally advise investing aggressively early in your career, investing most of your savings in stock funds, and then decreasing risk as you approach retirement by shifting more of your assets into bonds and stable value investments.
For example, you might consider investing your retirement savings in a 90%/10% mix of stock funds to bond funds in your 30s, then shift the mix to 70%/30% in your 40s, then 60%/40% in your 50s. These are just examples. Talk with a financial advisor to decide what kind of investment mix you need.
4. Live a healthy life
Health care may be one of your largest expenses in retirement. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2018 may need about $280,000 in savings (after taxes) just to cover health care expenses. This is just a general estimate, and your mileage may vary depending on when and where you retire, how healthy you are, and how long you live, among several other factors.
You have control over many of the factors that will affect your retirement health care expenses. Living a healthy lifestyle may help you hold down medical costs. Live well starting right now and continue your healthy habits through retirement. Eat a healthy diet, exercise, avoid known risk increasers like smoking, and live an active, socially engaged and joyful life.
To gauge how your current lifestyle may affect your long-term health and longevity, check out the Living to 100 Life Expectancy Calculator. It weighs factors such as stress, sleep habits, exercise, family history and even whether you wear sunscreen and floss your teeth.
Even if you’re Wonder Woman or Iron Man, medical costs are inevitable, so you’ll need insurance and probably require extra savings to fill in any gaps in coverage. Even if you wait to retire until you qualify for Medicare, you may still want to purchase supplemental insurance to provide more complete coverage. These extra monthly premiums are something you’ll need to budget for. If you plan on retiring well before you qualify for Medicare, say, in your early 50s, you’ll either depend on extended benefits from your employer or pay your own way with private health insurance.
A separate issue is the cost of long-term care. Long-term or nursing home care is not covered by Medicare and generally not covered by other types of medical insurance. To be extra safe, consider buying a long-term care policy in your 50s or early 60s. Initial premiums can rise quickly if you try to buy a policy when you’re older.
