You may have heard the rule of thumb that you need to replace about 80% of your preretirement income if you want to maintain your current lifestyle when you retire. But like many rules of thumb, that advice is much too general for most people, says Herbert Poole CFP® CRC®, Retirement Development Consultant for Wells Fargo Advisors.
To help ensure that you can actually live as comfortably in retirement as you do now, Poole says you need to identify what your desired lifestyle costs. Next, you’ll need a saving and investing strategy that matches your income needs. Here are the key questions for you and your financial advisor to consider:
1. What’s my ideal retirement age?
This is both a financial and a quality-of-life question, says Poole. Financially speaking, you need to determine when you’ll have amassed enough savings and investments to stop working. You want to be able to comfortably live on withdrawals from your accounts — without running out of money.
On the nonfinancial front, think about what you really want to do during retirement. (Travel? Start an encore business?) “Ask yourself: ‘At what age could I retire and still be healthy enough to do these things?’ ” Poole suggests.
As you get closer to your actual retirement age, you can home in on when you can afford to leave work. “Depending on your situation, working just a year or two more than you planned could make a big difference in how much money you have available to live on later,” notes Poole.
2. How much money do I need to support my current standard of living?
This is perhaps the most important question to explore. “However, you’d be surprised by how many people answer this question by saying to their financial advisors: ‘I have no idea. Just tell me what kind of lifestyle I can afford,’ ” says Poole.
You’re much better off estimating your target retirement budget early, so you can help ensure you’re saving and investing enough, says Poole. Your financial advisor can offer help estimating costs for items like health and long-term care for different parts of the country.
During this process, Poole says it’s also a good idea to separate your necessary costs (mortgage/rent, utilities, food, transportation, etc.) from your discretionary expenses (fine dining, vacations, and more). That way, you know where you can cut costs if your estimated retirement income ends up being different than you planned.
It’s OK if you can’t pinpoint your retirement budget down to the penny at first. You have some time. “You’re like a photographer trying to focus in clearly on a subject,” says Poole, himself an amateur photographer. “At age 40, your budget will be a bit fuzzy as you try to focus in on your expenses. By age 60, though, you want to focus your plan very tightly and carefully before you push the button and actually quit working.”
3. What are my retirement income sources?
You may have a tax-deferred retirement plan through your job, personal and/or Roth IRAs, rental property income, and more.
Once you identify all your potential income streams, you can make some smart decisions — including increasing your investment contributions now — that could help boost your income when you retire. For example, your financial advisor can help you determine whether it would be wise to add more income-producing options, such as annuities or real estate, or to consider more tax-advantaged investments.
4. How can I plan for the unexpected?
To avoid a financial snag that significantly affects your retirement income, Poole suggests having both contingency funds and contingency plans.
For contingency funds, you could earmark money for your grandkids but hang on to the funds in case of an emergency. This could be as simple as leaving money to your grandchildren in your estate plan, rather than putting the money in trust in their names.
Contingency plans might include paying for expensive home repairs like a roof replacement before retirement. You might also prioritize which assets (vacation home vs. business rental, for example) you would sell in a financial emergency.
5. Am I regularly monitoring my progress toward retirement?
Maybe you have 20 years left before retirement, or perhaps you’re already in the middle of retirement and planning to live to age 100. Wherever you are in the process, it makes sense to talk with your financial planner at least once a year — or whenever you face a significant life change.
After all, the financial markets and your investments are constantly changing. You change over time, too. You may decide to retire to a state with a different cost of living or change your mind about how much risk you want to take with your investments. All of those factors could affect your retirement lifestyle and how much income you need to live well in retirement.
Regular check-ins with your financial advisor help you review and possibly update your retirement plan quickly, so it doesn’t stray off course.