The Ultimate Guide to Planning for
Your Dream Retirement Lifestyle
If you want to live the retirement lifestyle of your dreams, it’s essential to start saving early and consistently. Without a clear idea of how much you should save for retirement each month, planning for retirement might feel like gazing into a distant horizon.
When you invest for retirement monthly, you have the power of compounding on your side which allows your money to work as hard for you as you’ve worked for it!
In this post, we help you figure out exactly how much you need to have saved before that retirement party so you can sail off into the golden years without the fear of running out of money.
We’ll guide you through the 3 important questions to ask yourself about your ideal retirement. Then, we’ll help you answer that big question of “how much retirement savings do I need?” by calculating your Target Retirement Nest Egg. From there, you’ll have everything you need to determine how much to save for retirement monthly so you can live your best life – now and in retirement.
3 Questions to Determine How Much Retirement Savings You Need
Before getting into any numbers, it’s important to answer some practical and heart-centered questions first to determine how much you need to save for retirement. If you’re planning for retirement with your spouse or partner, consider answering these questions separately at first and then discussing them together.
A financial advisor can also walk you through these questions and put together a financial plan that sets you up for achieving your retirement goals with less stress and more ease. If you’d like to schedule a complimentary call with one of our financial advisors, you can do so here.
1. When do you want to retire?
Knowing the age you want to retire is important for two reasons:
- It helps you estimate the number of years you’ll need to support yourself financially.
- It allows you to create a solid savings plan by knowing how many years you have left to accumulate the nest egg you need without running out of money.
If you haven’t thought about when you want to retire, consider how many years you’d like to continue working. Do you belong in the camp of “I’m ready to retire yesterday” or in the camp of “I get so much meaning and joy from what I do that I don’t think I’ll ever retire”?
There’s no right or wrong answer here – only the one that feels right to you!
You may find it helpful to reflect on the questions below and really visualize your ideal retirement.
- What activities would you love doing on a daily basis?
- How different is your ideal retirement from how you’re living now?
- What in your life would have to change to get to that ideal future?
- How is your health as it relates to the activities you’d love to do in retirement?
- What brings you the greatest sense of purpose and fulfillment in life?
Answering these will give you a better glimpse into your target retirement age.
2. How much will you need to live on monthly?
Once you know when you want to retire, you’ll need to figure out how much you’ll need to live on in retirement. There are several important considerations to help you arrive at a reasonable and realistic estimate:
A) Where do you want to live?
The cost of living in your chosen retirement location will significantly impact your essential and discretionary financial needs. That’s why this is one of the keys to figuring out how much you need to save for retirement.
Are you planning to stay in your current home or move to your dream retirement location? If you’re considering moving, research the living costs in your ideal retirement destination so you can start planning accordingly.
B) What activities will you be doing frequently?
Knowing what activities you’d like to do in retirement will help you get a better feel for how much money you’ll need to live on every month. If you picture yourself taking cruises, traveling abroad, and visiting grandkids on the other side of the country, you may need to build a higher cushion for your spending.
If, on the other hand, you see retirement as a time to downsize and enjoy the serenity of working in your garden or in your community, your estimated cost of living might be lower than it is now.
C) How will your expenses change?
Lastly, as you answer the question of “how much retirement savings should I have?”, you’ll want to review your essential expenses today and determine:
- Which expenses will continue (like your mortgage, insurance, or car payments)
- Which expenses might stop or decrease (like commuting or work-related costs)
- Which expenses will likely increase (your healthcare costs)
Based on the 2022 Fidelity Retiree Health Care Cost Estimate, a person who reaches the age of 65 may require approximately $157,500 to address healthcare expenses during their retirement. A retired couple may need around $315,000 [1].
And lastly, don’t forget to take inflation into account. Inflation is a gradual increase in prices that can erode the purchasing power of your money over time. Since 1960, inflation in the US has averaged around 3.8% and was at 8% in 2022 [2].
Given your answers to the questions above, how much will you need coming in every month to live a comfortable retirement?
Multiply this amount by 12 to get your Annual Retirement Income Goal. For example, if you need $12,900 per month, that translates to roughly $250,000 per year. That would be the Annual Retirement Income Goal you’ll want to aim for.
3. What do you expect in income and return?
Now that you’ve determined your target retirement date and estimated expenses, let’s look at how much money you might expect to receive from guaranteed income streams and your investments.
Here are some questions to ask yourself to determine how much to expect in guaranteed income:
- Do you expect to receive any pensions from your previous or current employer?
- How much do you expect to receive from Social Security benefits? (Go to https://ssa.gov for an estimate)
- Do you currently have any annuities that you plan to use for income in retirement?
Once you’ve added up the numbers from any potential guaranteed sources of income in retirement, subtract this from your Annual Retirement Income Goal to arrive at a better estimate of how much to save for retirement monthly.
For example: If you determined that you need $250k/yr to live a comfortable retirement lifestyle and you estimate receiving $50k/yr from pensions, Social Security, and other sources, you will need to fund the remaining $200k/yr from your investment and retirement accounts.
You’ll also want to have a general idea of the rate of return on your invested assets. This will allow you to see how the power of compounding will help your money grow now and over time based on your allocation.*
How Much Retirement Savings Should I Have? Calculating your Target Nest Egg
Using the answers to the questions above, fill in the following paragraph to calculate your Target Retirement Nest Egg and get your monthly retirement savings goal:
I want to retire by age ___.
I need $ ______ per year to live a comfortable retirement lifestyle.
After my guaranteed income sources, I will need to fund $______ per year from my own assets. I expect that my money will earn __% per year given my current allocation and risk tolerance.
Now comes the fun part – calculating your Target Retirement Nest Egg:
Take the amount you need to live on every year (your Annual Retirement Income Goal calculated in step 2 above) and divide it by .04.
Why? Because a common rule in financial planning is that .04 (or 4%) represents a rate of what you can take from your Nest Egg every year without running out of money. Note that your unique circumstances, risk tolerance, and needs dictate the best withdrawal rate for you. But 4% can be a good place to start until you meet with your financial advisor or CFP®.
Continuing with the example above, let’s say you determined that you will need to fund $200k/yr that you can live on from your investment and retirement assets: $200,000 / 0.04 = $5,000,000
This means you’ll need to have $5,000,000 saved by your target retirement date to achieve your goal of being able to draw $200k/yr from your assets to sustain your retirement lifestyle.
So, what’s your Target Retirement Nest Egg?
If you’re still not yet sure about how much you’ll need to live on retirement, consider the quick rule of thumb many financial experts recommend: Plan on needing at least 70-85% of your current income in retirement.
Know Your Net Worth
Last, but not least, you’ll need one more number to find out how much you should save for retirement per month: your Current Investable Assets.
Getting to this number will allow you to calculate how much you currently have saved and invested for retirement. Note that this can also include money not currently designated as retirement funds. This could include investments that could be used to fund your retirement if there are no other goals for that money. (Exclude your home and other physical assets that you’re unlikely to sell to fund your retirement.)
Here’s a quick, but not exhaustive, list numbers to include to arrive at your Current Investable Assets to fund your retirement goals:
- Your 401ks (current and/or from prior employers)
- Your IRAs & other retirement accounts (Roth IRAs, retirement assets for self-employed)
- Investment accounts that include stocks, bonds, and other investable assets
- Cash in savings and checking accounts (only include this if you plan to use it to fund your retirement goals)
Add up these amounts to arrive at your Current Investable Assets or have your financial advisor help you arrive at this number.
Know How Much to Save For Retirement Monthly
Finally, using your Current Investable Assets and the numbers estimated above, use this simple calculator to arrive at your monthly retirement savings goal: Savings Goal Calculator (www.Investor.gov)
Here’s how to know which numbers to enter into the calculator to figure out how much to save retirement monthly:
- Your Savings Goal is your Target Retirement Nest Egg
- Your Initial Investment is your Current Investable Assets
- Your Years to Grow is the difference between your current age and your retirement age
- Your Interest Rate is the estimated return on your invested assets
- Select Monthly for the Compound Frequency (since you’ll save for retirement monthly)
Now simply click Calculate and you’ll have an estimate of the amount you need to be saving so you can live the retirement lifestyle of your dreams!
The great thing about this calculator is that you can adjust the numbers as needed to arrive at a goal that feels realistic to you right now. This might mean adjusting the Savings Goal, Years to Grow, or Interest Rate.
How to Achieve Your Retirement Goals Faster
Now that you know how much you should save for retirement per month to achieve your desired retirement lifestyle, you need a plan so you can actually stick with your savings! After all, the hardest part of saving – for nearly everyone – is discipline.
So how can you make saving for retirement easier and less stressful? Automate your retirement savings! Set up automatic 401k contributions with your employer or schedule an automatic transfer into your retirement accounts if you’re self-employed.
Remember, every penny saved is a step closer to the retirement of your dreams. The sooner you take the first step, the less overwhelmed you’ll feel later on…so you can truly enjoy life today while moving confidently toward your retirement years!
Want the help of an experienced financial advisor and CERTIFIED FINANCIAL PLANNERTM (CFP®) professional to guide you in creating a solid plan to achieve your retirement goals faster? At Hendershott Wealth Management, we pride ourselves on helping women and couples achieve their financial goals in a way that aligns with their unique values and needs. Schedule a complimentary call with one of our highly qualified advisors and CERTIFIED FINANCIAL PLANNERTM professionals today.
References:
[1] https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
[2] https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=US
*It is important to note that a higher rate of return typically comes with a higher level of risk. That’s why it’s important to speak with your financial advisor or CFP® professional before making any investment decisions or changes to ensure that your money is invested to earn you the highest level of return based on your individual risk tolerance.
All investing involves risk, including the potential loss of principal. There is no guarantee that any investment plan or strategy will be successful. Advisory services provided by Hendershott Wealth Management, LLC (“HWM”), an investment advisor registered with the U.S. Securities and Exchange Commision. Registration does not imply a certain level of skill or training.
All written content in this article is for information purposes only. Opinions expressed herein are solely those of HWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
