How much money will you need for retirement? It’s an incredibly important question, but most people do not put a lot of thought into it. A well thought out answer takes into account inputs such as the cost of living where you want to retire, the cost of healthcare, how lavishly you want to live in retirement, etc. Calculating these inputs takes time and effort, but is well worth it once you reach retirement.

Conventional Wisdom Debunked

            Many people believe that an annual income in retirement should be about 70% of what they were making annually before retirement. For example, someone earning $120,000 a year before retirement should have an income of $84,000 a year in retirement. However, research shows that 70% is far too low. A more realistic number for retirement is an annual income that is 130% of what a retiree was making pre-retirement.

Why 130%

            It is easy to look at needing 30% more annually than you were making before retirement as a ridiculous suggestion, until you look deeper. Having a career lends itself to actually spending less money. While at work people generally do not spend much, if any, of their own money. For most, that is at least eight hours a day, 5 days a week where they are not spending their own money. Then after work, at least from Monday-Thursday, many people look to come home and relax rather than go out. Therefore, during the average person’s working years, there are generally three days where substantial amounts of money are spent. During retirement however, every day becomes like the weekend, which for most will lead to more traveling, shopping, events, and eating out. Without the burdens of work, a retiree is in the position to spend money all day every day.

Everyone is Different

         130% of your annual income prior to retirement is a great guidance number, but is not one size fits all. An effective retirement plan takes into account the specific lifestyle you plan to have. A study conducted by the Wall Street Journal and MoneyComb found that the best way to plan for your specific retirement goals is to break down spending into seven categories. Those seven categories are: (1) eating out, (2) digital services, (3) recreational and personal services, (4) travel, (5) entertainment, (6) shopping, and (7) basic needs. This method requires you to look at the things you really enjoy and analyze how much they cost. Someone whose definition of travel is driving two hours to the closest beach will have a much different travel cost than someone who wants to explore Europe.  The discrepancy does not even have to be very large to make a difference. Things as small as the choice between alcohol or water with dinner or having subscriptions like Netflix or HBO can add large amounts of money over your retirement years.

Making the Calculation

         Once you sit down and determine what sort of lifestyle you want to live in retirement, you can determine what amount of money you will need for retirement. The first step is to figure out the annual amount, which is all the costs you just determined accumulated over one year. Next is deciding how long you expect retirement to be, for most people that is about 20 years. Take the annual number and multiply it by 20 and you have an estimate for retirement.

How Smith Strong Can Help

            The experienced professionals at Smith Strong are able to sit down and make a comprehensive estate plan with you, that takes into account your retirement plans. Having our attorneys guide you through the process will take much of the stress from your shoulders. Attorney Van Smith also offers a no-cost estate planning workshop to help get you started with the process. More information on the workshop can be found on our website under the “Info” tab. To schedule your first meeting or attend our free estate planning seminar call (804) 325-1245 or (757) 941-4298.

Editorial Assistance By: Michael Gee - Law Clerk

H. Van Smith
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