According to a 2019 Charles Schwab survey, Americans estimated they would need $1.7 million to retire comfortably. However, only half of those respondents contributed less than 10% of their income to a workplace retirement fund, equating to less than $9,000 annually.
Estimating your retirement needs isn’t something you should leave to chance. Here are four key retirement basics that must be done right to ensure you can enjoy a comfortable future.
1. Setting the Right Retirement Savings Target
Many people focus on the idea of retirement but don’t spend enough time calculating the financial requirements to make it a reality. Your retirement number is the total amount you need in your fund to support your desired lifestyle for the long haul.
If you’re like most people, you may expect to live to around 80, but it’s wise to plan for a longer life — up to 90 or even 100. Without factoring in the rising costs of living and inflation, you could easily outlive your savings. According to a 2016 Federal Reserve report, the average retirement account balance was just $60,000, which is far from enough when considering the real cost of retirement.
To secure a stable retirement, make sure you calculate your retirement number with the help of a financial advisor or retirement professional. It’s essential to set a realistic and personalized goal for your future.
2. Not Having a Detailed Retirement Plan
It’s one thing to have a retirement number, but it’s another to have a plan that outlines how to use it. A retirement plan is more than just knowing how much money you need; it’s about creating a strategy for how you’ll live once you stop working.
Will you live in an area with a lower cost of living to stretch your funds further? Will you work part-time to supplement your income? Do you have an emergency fund to cover unexpected expenses? These questions are critical to shaping a comprehensive retirement plan and ensuring that you stay on track with your retirement savings.
A well-rounded retirement plan will help you navigate your finances during retirement and give you clarity on how to manage your resources over time.
3. Failing to Account for Medical Expenses
As you age, healthcare becomes one of the largest and most unavoidable expenses. Many retirees underestimate the cost of medical care in their retirement plans, often overlooking this vital component of their financial strategy.
According to recent data, the average retired couple can expect to spend at least $400,000 on medical expenses throughout their retirement years. Given the rising costs of healthcare, it’s crucial to include medical expenses in your overall retirement calculations.
To mitigate this, consider opening a Health Savings Account (HSA), which can be used to save tax-free money for medical expenses. This could help ensure you are prepared for healthcare needs without depleting your retirement funds.
4. Withdrawing Too Much from Your Retirement Fund
While it may seem tempting to withdraw a large sum from your retirement savings early on, doing so can lead to costly penalties, taxes, and fees. Excessive withdrawals could also leave you without enough funds later in life, when you may need them most.
To avoid this pitfall, set up a sustainable withdrawal strategy that aligns with your retirement plan. Work with a financial advisor to create a budget and schedule for how much you can safely withdraw each year. The goal is to ensure your money lasts and remains sufficient to cover your needs well into your golden years.
Planning for retirement involves more than just saving money; it requires thoughtful preparation and foresight. By addressing these key retirement basics, you’ll put yourself on the path to a financially secure future.
