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Saving for retirement has long been a primary financial concern for working adults in the United States. Being uncertain about the amount of money you will need for retirement, however, can lead to uneasy feelings about the future. In the times of COVID-19, those feelings of uneasiness are exacerbated, as the epidemic has shaken our economy and stock markets. Increased market volatility has caused many Americans’ retirement savings accounts to plummet in value and widespread unemployment has slowed or halted retirement contributions for hundreds of thousands of people. Many wonder if they will be able to retire on time or at all.
Luckily, when it comes to retirement, the key to success is proper financial planning. Financial plans are generally built by using average estimates. Average estimates take into account times of both economic prosperity and economic depression. This means that as long as you create a long term plan and stick to it, you have a good chance of recovering from the bad times and still achieving your goal.
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The first step of the financial planning process is to determine how much money you will need to meet your retirement goals. To pinpoint this amount, it is best to take an honest look at your spending. Taking an accurate look at your spending habits, as well as accurately projecting your spending habits during your retirement years, is crucial in creating an effective savings plan. For example, if you plan on living comfortably during retirement and desire to indulge in things like travel and gifting, then you would not want to base your savings goal on a bare bones budget that only covers the basics. You will want to use a spending figure that is at the top of what you think the range will be to give yourself a proper cushion.
Once you have determined your spending needs, you will want to try to estimate your life expectancy. Humans are now commonly living into their mid-nineties and even into their hundreds, so it is always better to financially plan for a longer life than a shorter life. After all, running out of money and having to live your last years (when many people commonly have more medical problems) penniless is a far worse situation than dying with excess money. You may be able to get a rough idea of how long you might live by looking at the length of your family member’s lives. If your parents or grandparents all lived very long lives, you will surely want to plan for the same.
Multiply your the estimate for your annual spending by estimate for your life expectancy to get a rough figure for how much money you will need to last you through the rest of your life. Don’t forget calculate in inflation and take into account the rise in the cost of living over time, as both of these factors can make a huge difference in having an accurate savings goal. There are many resources online for financial planning that can help to calculate these figures.
After finding out your overall savings goal, you will want to consider how your various streams of income will reduce the amount of your budget that will need to come personal savings accounts. Examples of income streams that senior citizens may receive include pensions, social securtiy payments, and annuities. When planning, it is important to note whether the amount of these payments will be adjusted over time for inflation so that you get an accurate calculation.
By reducing your overall savings goal by the amount of the income payments you anticipate receiving, you will arrive at the amount that you are personally responsible for saving on your own in your 401k, IRAs, and other types of savings and investment portfolios. With this information you can calculate how much saving you need to do monthly during your pre-retirement years to meet your goals. If the amount that you need to save is impossible to achieve with your current earnings, you will need to determine whether you can reduce your current spending, or reduce your spending once you enter retirement. A small reduction in your spending now can make a big difference in the comfort of your life in the future.
Retirement should be a time where you can enjoy the life you have built after decades of hard work. Financial stability and comfort during your life as a senior citizen is within reach if you take the time to plan properly in advance. While there is no one figure of how much money is enough to retire that fits everyone’s situation, finding your personal savings goal and saving accordingly will put you on a path to success in the future.
