Six Questions When Setting up Retirement Savings Goals
Can You Say "Yes" to These Retirement Questions?
Last Updated: April 18, 2016
Whether you're already saving for retirement or you haven't a clue where to begin, ask yourself these six essential questions about your retirement savings goals. In some cases it may surprise you, but every one of these questions needs a "yes" from you.
1. Do You Expect Your Annual Living Expenses to Stay About the Same?
Most people assume their living expenses will fall in retirement. After all, when you're retired, you're no longer saving for retirement. Plus, you've likely paid off the mortgage and college for the kids. However, other expenses inevitably creep in to take their place.
Healthcare. The older you get, the more health issues you are going to face. This means increased premiums, deductibles, co-pays, and prescription drug costs.
Also, consider that Medicare does not cover long-term care (e.g., assisted living, nursing home care), dental care, eye care related to prescription glasses, dentures, hearing aids and exams to fit them, or routine foot exams.
Plus, there is always the possibility you could have a costly medical expense before you qualify for Medicare (at age 65), which could take a big chunk out of your retirement savings for costs not covered by health insurance. This could also mean more serious, costly complications down the road.
Travel. When you think about your retirement goals, travel likely ranks close to the top of the list, if not number one. The last thing you want to do is forego trips you've waited your whole life to take, but making them happen won't come cheap.
2. Are You Planning to Live to 100?
According to the Social Security Administration, a man who turns 65 today can expect to live, on average, until 84. A woman who turns 65 today can expect to live, on average, until 86. However, life expectancy is only going to increase going forward. So the younger you are today, the more years you should expect to add to your lifetime and, in turn, your retirement funding needs. Many experts advise projecting your life expectancy to age 100, just to be safe.
In the simplest of terms, let's say, when you retire, you're living on $50,000 a year. Presume you'll need the same every year you are in retirement. If you retire at 65, and live another 20 years, that means you need $1 million in retirement savings (or income). However, if you retire at 65 and live another 35 years, that means you need $1.75 million in retirement savings (or income).
3. Are You Saving 15 to 40 Percent of Your Income?
The older you are when you start saving for retirement, the larger the percentage of your income you need set aside each year.
Generally, if you start saving in your:
- 20s, save 15 to 20 percent of your income
- 30's, save 25 to 30 percent of your income
- 40's, save 35 to 40 percent of your income
- 50's, save 45 to 50 percent of your income
Do the math and find the percentage that works for you. Just remember to subtract from your savings goal anything you already have coming to you in social security benefits and pension.
4. Are You Investing Your Retirement Savings?
Socking away retirement savings into a regular savings account or money market funds won't cut it if you want to reach your retirement goals. You simply must take advantage of investment opportunities that stand to give you a decent rate of return, including:
- 401(k) contributions
- Individual Retirement Accounts (IRA's)
- Stocks and bonds
Your annual rate of return will depend on a variety of factors, but provided you're exhausting all of your investment options, you should safely be able to expect 5 to 6 percent.
5. Have You Considered Retiring in a Place With Lower Living Expenses?
While this may not be a desirable choice for everyone, it's certainly worth considering. The higher the cost of living where you are now, the more you stand to save by retiring in a city where housing, food, and other expenses cost less. See our list of the top 20 Most Affordable Places to Retire.
6. Are You Planning to Work Past Your Retirement Years?
While the prospect of never having to work another day in your life may sound like a dream come true, consider the benefits of the alternative. The longer you can generate income -- be it through a part-time job or your own business -- the longer you can preserve your retirement savings. You just may find yourself embarking on a second (or third) career that not only supports your retirement years, but enhances your overall quality of life.