We all plan to retire at some point in our lives. For many, the retirement age to get most of your social security benefits will be at the age of 67. The quality of your life past that age relies on how much you have in your 401k retirement account. If you are relying on social security to take care of you, you are headed straight for trouble.
In the future, social security may not be able to pay you the full amount you have earned. In fact, the money you’re putting into social security right now isn’t even going into your account. That money is being used to pay out current retirees. If that doesn’t make you motivated to deposit more money into your own retirement account then nothing will.
Even if social security does pay you the full amount, it will not be enough to live a comfortable life. If you’ve been reading this site then hopefully you’ve created a budget. Look at your total monthly expenses. Will your social security check be as big as that? I doubt it.
If you’re spending $3,000 a month and your social security check is projected to be $1,500 a month then you need to make up the rest somehow. Just in case you’re wondering, $1,500 per month means you’ll need $540,000 if you live for 30 years after retirement. This is assuming things don’t go up in cost, which they undoubtedly will.
Calculating how much money you will need to have saved up by the time you retire is a must. If you don’t know how much you’ll need later, then you don’t know how much you should be putting away right now. But that calculation is hard to do because it’s different for each person. Here are some of the factors involved in determining how much you need to save up for retirement.
How Long You’ll Live
If your parents and grandparents lived to an old age, you might live that long too. With that in mind, you might need to plan for a 35 year retirement rather than a 20 year one. If there’s a history of certain costly ailments in your family then you will need to assume you’ll fall prey to it as well so you should adjust your retirement savings goal accordingly.
The longer you live also means the more you will need to spend on medical care. And as I’m sure you’re aware health care costs are rising at an alarming pace.
Quality Of Life
The amount of money in your retirement account will completely depend on how much money you have saved up in your 401k.
If you plan on traveling during your golden years you better have the bank account to justify it. If you will want to buy a car some time between your 60’s and your 80’s then you will also need to have money for it in your savings account.
The price of everything will continue to go up every year. This includes the cost to fill up a tank of gas and the price of food at the grocery store. Just because you spend $150 on gas and $300 on food now doesn’t mean that’s what you’ll spend in retirement. Take these increases into account in your planned retirement budget.
Do you plan on having a mortgage after you retire? If you’re renting now and plan to continue renting, you will be paying rent throughout your whole retirement. Sure, you won’t have to deal with property taxes, insurance and maintenance costs, but you will be paying rent forever.
The savings you get now will not make up for the many years of rent you’ll be paying during retirement while others have completely paid off their homes.
Another reason not to rent is that rent prices will continue to go up, even while your retirement budget will not. Mortgages are a fixed payment for 30 years and then $0 after it’s paid off.
So let’s say that you planned ahead and bought a house in your mid 30’s. You would think you’d be done paying it off by the time you’re in your mid 60’s right? Think again.
What if you have trouble making your payments in your 40’s and decide to refinance to lower your payment. Now you’ll have a mortgage well into your 70’s.
What if you lose your job in your 50’s and you have to sell the house and rent? Since you don’t know the future, plan for the worst case scenario of having to pay rent or a mortgage well into your retirement.
The Stock Market
There are countless calculators online that will help you figure out how much you need to be saving to reach your retirement goals. What these calculators can’t do is tell you the rate of return on your money.
If you do well and get a steady 9% return then you should be fine. If you end up averaging just 3% then your money won’t grow as much as you thought – meaning you would have had to deposit more money. But how do you know how much your money will grow? You don’t.
If you opt for the safe route, you won’t get high returns, but your money is relatively safe. If you decide to take risks with your retirement savings you could earn big or go into the negatives. So when you use these calculators make sure and change the interest rate number around to see how that changes things.
Go For A Test Run
If you’ve read through this post and decided to create a retirement budget, you’re on the right track. The final step is to actually practice living in retirement.
For many, their retirement expenses will be less than their current expenses. The reason being that they’ll use their car less, they won’t have to spend money on their kids or they won’t have a mortgage payment.
Regardless of what you plan your retirement expenses to be, go for a test run and see whether you can live on this amount. Try it out for a couple of months. If you have trouble staying in budget for these two months, now imagine how hard it would be to stick to it for the next 25+ years.