Contrary to what many financial planners suggest, you can live on a lot less than 100% or even 80% of your pre-retirement income. In fact, a survey by T. Rowe Price of new retirees who have 401(k) account balances or rollover IRAs found that you can live comfortably on a lot less. The report suggests that nearly three years into retirement, the majority of retirees are living on just 66% of their pre-retirement income on average, or $58,000 annually.
Eighty-five percent of the survey’s 1,507 respondents say they don’t need to spend as much as they did before retirement to be satisfied. And, 57% report they live as well or better than when they were working.
These numbers are also in line with the average retirement income 2018 for all retirees.
Is $58,000 a Year Really Enough Retirement Income? Too Much?
“It [$58,000] doesn’t surprise me,” says Cynthia Petzold, a certified financial planner with CommonWealth Financial Planning LLC in Roanoke, Va. “Each person’s situation is different, but I think that $58,000 is really on target [to cover] basic living expenses.”
But the figure likely doesn’t include special or one-time expenses, such as traveling, house repairs or car replacements, she adds.
However, the consensus among financial planners is that there isn’t one magic income number that everyone should strive to achieve. The only real way to determine the amount you and your household will need is to either work with a retirement planner, be really good with spreadsheets or use a high quality online retirement calculator.
The Importance of Budget Projections for a Secure Retirement
“At least as important as how much you’ve saved is what your spending pattern is,” Petzold says. “Take a look at what you think your expenditures are going to be like during retirement: basic expenses (utilities, insurance, groceries, car maintenance) and then the special expenses (travel, home renovations, weddings).”
To plan a secure retirement, you need to get serious about budgeting your next 20-30 years. That may sound crazy or unrealistic, but you can break your projections down into 5 year increments or think about big milestones like kids graduating college or your spouse’s retirement.
You can also think about retirement in phases — an active phase when you first quit working and may be spending even more than when you were working, a slowing down phase when you start to spend less and an end of life phase where healthcare costs might be expensive.
The NewRetirement retirement planning calculator let’s you do this kind of lifetime budgeting — you can set as many different spending levels for as many different phases of retirement as you like.
Need more guidance? Here are 9 tips for predicting retirement expenses.
Create a Buffer in Your Retirement Savings
Make sure to include those occasional expenses, which can take significant chunks out of your savings if not budgeted for properly.
Home and car repairs, entertainment expenses and rising health care costs are often forgotten about during the planning stages, but these should be added to the $58,000 figure to create a buffer in your budget.
And, don’t forget travel. Travel is the most desired retirement pursuit by the highest numbers of retirees.
“You don’t want to be in a position post-retirement where something comes up [that can] destroy your retirement plan,” says Jim Cantrell, a certified financial planner with Brookfield, Wisconsin-based Financial Strategies Inc. “You want some buffers in your retirement plan, and one way to do that is to estimate costs on the high side — add in those occasional expenses. If they’re not in the plan, those can be $10,000 to $50,000 that you weren’t expecting and can really damage your retirement plan.”
For example, most retirees tend to replace their car within five to 10 years of retirement, he says. So to plan for that cost down the road, retirees should look at how much it might cost to buy a new or used car and add that into their budget.
Being flexible is key to setting and reaching your target retirement income level.
“Once you’re in retirement, then every year take a look at your planned expenditures, your sources of income and adjust your spending depending on what your income is going to be,” Petzold suggests. “Be flexible as you’re thinking about your retirement spending. Sometimes I don’t think people understand that you don’t have to take out the same amount every month.”
The NewRetirement retirement planning system saves your data so it is easy to make adjustments and keep things up to date.
Ultimately, finding the right balance between your cash flow and spending patterns, while adjusting for any occasional expenses, is key to living comfortably in your retirement.
“People say financial planning is like a puzzle, but I don’t think that’s true,” Cantrell says. “It’s more like a Rubik’s Cube: All the pieces are interrelated with the other pieces. Anytime you say ‘I’m going to change what I spend on one thing,’ it changes what you spend on everything else.”
Model different spending patterns to see how well prepared you are for retirement
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