How much money you need in retirement depends on a host of variables beyond how much professionals suggest you save each year. Each person will need a different nest egg, depending on the priorities, lifestyle and other assets.
If you don’t have a goal in mind yet about how much money you’ll need in retirement, here are four questions to ask yourself to get a handle on on it, according to Jason Mengel, a Certified Financial Planner, in Kiplinger:
1. At What Age Do You Want to Retire?
Early retirement is a dream for many, but it also has implications for most retirement accounts and benefits.
Retiring before 59 and a half means you won’t be able to access your super funds without incurring penalties. Your pension won’t kick in until you’re 65 but you can expect that to creep upwards as more years go by. (The retirement age increases by more than a year every decade.)
Not everyone can wait to retire, but planning out which age is most likely for you and your spouse will allow you not only give you a better picture of your retirement and how much you’ll have to save, but you’ll be able to build up a cash cushion to tide you over for the years before you can tap your superannuation funds.
2. How Long Will You Be Retired?
A morbid question, but an important one to consider. How long do you expect your retirement to last? Now that humans are living longer, your retirement could be several decades long.
“According to data from the Australian Institute of Health and Welfare, life expectancy in Australia has improved dramatically for both sexes in the last century. A man or woman reaching age 65 today can expect to live, on average, until age 82.50 years.
And you’re going to have to have enough money to get by.
3. What Will Your Expenses Be?
Related to the previous two questions, what expenses do you anticipate? Are you going to stay in your home? Rent? How about driving? Day-to-day expenses? Do you plan to travel? How’s your health?
“You can and should put together a preliminary budget to figure out how much you’ll need to live the lifestyle you want,” writes Mengel. You can’t plan for everything, but thinking through how you hope to live in retirement will give you a better idea of how much money you need to save now.
Plus, don’t forget inflation. Even if you ate the same thing every day, you’re going to spend more on it in later years of retirement than your first year.
4. How Much Can You Save Now?
Once you have an idea about the first three questions, you can see how your current savings stacks up. If you foresee a large retirement income gap — the difference between your retirement income and your actual expenses, Mengel says — then it’s time to make some changes.
“If you haven’t retired yet, you can make adjustments to help deal with a projected shortfall — by working longer, saving more, making changes to your portfolio and/or other strategies,” he writes. “But once you retire, that becomes much more difficult.”
Again, saving for retirement isn’t easy — we’re all trying to make it work the best way we can. But by taking into account your longterm plans and dreams, you can make changes now that will help you decades down the road.