The idea of what makes a comfortable or good retirement varies based on personal goals and preferences. But the fact that there is no one-size-fits-all amount each person needs to save shouldn’t deter you from figuring out the best possible plan for your retirement.
How can you determine what that magic number will look like for you? Use these three steps to get clarity and confidence about where you stand in relation to your ultimate goal:
1. Determine Your Net Worth
You can define what financial success looks like in terms of your net worth. You need to start with your net worth to understand where you currently are financially so that you can develop a plan to get to your goal.
Your net worth is all of your assets, minus all of your liabilities. Your assets are all your investments, bank accounts, cash, and could include your property (although some people leave out the value of their home from net worth calculations if they plan to live in it during retirement).
Your liabilities are your debts or anything that you owe: credit card balances, what’s left on your mortgage, other loans, and so on.
You can use a net worth calculator to help you, or you can talk to a financial planner who can review your finances and help you put together a comprehensive plan for your future.
The process can get overwhelming, especially if your net worth wasn’t what you were expecting. It often brings up a lot of questions about whether or not where you are today is good enough to get you to the financial future you want. It is important to be aware of these numbers so that you can start properly preparing for retirement.
2. Envision What Your Retirement Expenses Will Be
Now that you know your net worth, or what your wealth looks like today, you need to understand the other side of the coin: where you want that net worth to take you. You can only know how much money is enough to retire by laying out what you actually want that retirement to look like. In other words, how much will your retirement cost you? What does that look like on an annual basis?
It’s difficult to know exactly what your expenses will be (especially if retirement is still a decade or so away for you), but you can start estimating. You can create a mock retirement budget to get a better idea of what your expenses will look like. To do so, start with the easy stuff: your set costs like living expenses and necessary bills. These might include:
- Housing and utilities: Where do you want to live? Will you downsize or move to a vacation hotspot? Do you want to travel a lot? What does that mean for your permanent residence?
- Transportation: Can you downsize how many cars your household maintains once you retire? Will you move to a place that’s more walkable or accessible by public transportation or will you move farther away from the city and expect transportation costs to rise?
- Insurance premiums: What’s your plan for health insurance? Will you drop term life because you no longer have financial dependents? Do you need other types of protection instead?
- Healthcare: Based on the benefits you can receive, what do your healthcare costs look like? Do you have an Health Savings Account (HSA) you can tap into?
Thinking about what your retirement will look like day-to-day, along with what bills you expect to continue to pay and which ones you’ll no longer need to take care of can help you build out the foundation of your budget. From there, you can consider what you really want and not just what you have to pay for. Think through your answers to questions like:
- Will you travel or do you want to spend lots of time in your community?
- Do you want to provide financial support to family members?
- What kind of activities or hobbies do you want to pursue?
- Will your lifestyle change and, if so, how?
It is a good idea to pad your budget a little bit with a few extra hundred dollars per month for unexpected expenses or costs you forgot to include. Then, you can multiply that budget by 12 to estimate how much your retirement will cost you each year.
Then, multiply that number by the amount of years you expect to be in retirement. If you retire at 65 and reasonably expect to live to 90, for example, then you should multiply your annual budget over 25 years.
3. Compare Existing Savings With What You Need for Retirement
If you came up with a retirement budget of $50,000 in annual spending, then you’d need $1,250,000 in your investment portfolio in order to safely retire today without running out of money.
Run your own budget numbers and then compare to the wealth you have to determine if you have enough. If you need help, this calculator can help you determine how long your retirement savings are likely to last or if you might outlive your current savings.
If you feel like you don’t have enough to retire, don’t panic. You might still be years out from a realistic retirement age, so you have time. Make the most of the last decade of your career and optimize your savings and investment strategy to grow your wealth.
Remember that you have options. You may be able to:
- Reduce your retirement expenses, so you need less in savings to live on.
- Create other income streams, so you don’t rely 100% on your savings.
- Work part-time or slowly phase out of your existing career so you extend the amount of time you earn a paycheck, which reduces the burden you put on your nest egg.
- You can also develop a smarter investment strategy now that allows you to make the most of your opportunities to put your money to work for you.