As part of retirement planning, you should determine how much you will be able to spend in your golden years so you could save enough for comfortable living.
There are many factors to consider while doing the math, and we want to help you get to the right number. We don’t have complicated formulas to share, only a few common sense tips. Read on for details…
Expect Expenses to Rise
When you retire, not all of your expenses will go down. Sure, you won’t be commuting any more — so, that cost is down — but other costs could and will increase.
For start, chances are you will be spending more time in your home, which will have an impact on your utility bills. Also, healthcare costs will start grow as well.
If you led a healthy lifestyle, chances are your encounters with the health system were limited to annual checkups. Unfortunately that could change once you reach the age of 65.
On the bright side, now that you have more time, you may decide to travel the world, meaning you will be spending more on travel, leisure and entertainment. Nothing wrong with that, just make sure to add that to your cost projections.
Finally, you may decide to move to another state and spend your golden years somewhere where the sun shines throughout the year. This change of location could hit your retirement savings, big time — so make sure to add that to your math calculations.
And let’s not forget inflation which will steadily be adding 2 to 3 percent per year to the cost of living.
The 60%-90% Rule
You may have heard of the 60%-90% rule. It involves planning to spend 60% to 90% of the after-tax annual income each year in retirement. For instance, if you were earning $50,000 per year before retiring and you had an effective tax rate of 15%, you were living on $42,500 after taxes each year.
Now if you decide you need 80% of that amount, you will need to save enough to have $34,000 each year in retirement. Multiply that amount with, say 25, and you get the total amount of money you will need to spend 25 years of life in retirement.
Of course, if you plan to live in a lower-cost community, it could be enough to live with 60% of your income; or in the other case — if you end-up living in an expensive area — you will need 90% each year,
The 4% Rule
A different rule states that you should start by withdrawing 4% of your retirement savings in the first year of retirement for your living expenses. From there, every consecutive year you should withdraw the same dollar amount, plus enough extra income to account for inflation.
This formula is based on the assumption that your retirement will last for 30 years. Depending on your family’s health history, you may opt to tweak it a bit and pull more or less every year. The idea, of course, is to make your money last.