You already work hard enough and you are probably already saving for your kids’ college funds, that new car you want, or even a bigger home. How can you possibly find the time, money, or even patience to start figuring out how much of a nest egg you are going to need for a proper retirement?
Well, the good news is that the whole process doesn’t have to be as mind numbing as you might think.
Trying to figure how to save enough money for retirement, how much you need to save, and where to invest it, is one of the most frustrating issues within the realm of personal finance. Of course, you already know that the amount of money you need will be dependent on the lifestyle that you want to live, but how can you possibly come up with a figure without already knowing how much everything will cost?
Are your dreams of touring the Caribbean on a luxury yacht achievable? Is it possible for you to find a way to retire down South and live in the lap of luxury? Or should you instead be aiming for comfortable living with the occasional treat now and then?
The problem with retirement savings is that a lot of people do not even ask themselves these questions, nor do they set realistic goals even if they do. While it is sad to say, these are the same people that end up cursing themselves down the road when they find themselves to be on the starting blocks of life all over again at the age of 65.
Thankfully, there is help and there are ways for you to avoid second mortgages, part-time work after retirement, and the daunting B word – bankruptcy.
One of the major drawbacks for retirement planning is that it often involves complicated calculations and complex formulas. The lingo that many financial advisors use is downright intimidating, while many people are simply looking for a savings estimate that they can aim for.
If your retirement is still a ways away, then it is incredibly beneficial to decide which type of retirement lifestyle you desire, and even crave. Do you want a large home with all the bells and whistles? Are you striving for a middle-of-the road retirement with a few high quality assets? Or are you comfortable with bare-bones living in a cozy area?
Once you have made a decision on which of the three retirement variations you want to achieve, continue reading on in order to get a look into just how much your post-work life is going to cost.
So you want to retire in the Lap of Luxury?
If you are looking for a little more than the average retirement offers, and want to jump over middle-class living, then you have to be ready for costs to skyrocket. The same basic assets will still apply to this lifestyle, as you will have cars, a house, take vacations, and dine out in restaurants. However, your cars will be a lot fancier, your house will be bigger, the restaurants you eat at will be classier, and your vacations will be lengthy and exotic.
With this type of lifestyle comes add-ons such as golf memberships, a boat, well maintained landscaping, as well as upgrades and amenities within a home. These are the retirees that have vacation homes around the world and a whole lot of money available for living life and spoiling the ones they love.
Sounds to die for right?
The real question is, how much is it going to cost you?
In the simplest of terms, if you do not have a pension from your employer then you are going to have to be a millionaire to afford this type of retirement. Assume for example that you will be getting $40,000 from your government pension plan or other income streams; you are going to need another $60,000 a year in retirement savings. This equals out to a substantial $1.5 million dollar retirement savings plan in order to live the way you plan to.
If that sounds like an absurd figure, take solace in the fact that you are not alone. However, these are the hard figures that people need to hear in order to understand that their retirement goals may just be a little bit lofty.
Need some good news? There is an exception to the rule. If both you and your spouse have had the pleasure of a public sector job, then your pensions could well be the ticket to luxury you have been relying on. To delve further into the matter, if you and your spouse both earn over $60,000 a year as public employees and plan to retire after 35 years of work, you are almost guaranteed enough pension to live like part of the royal family.
Your combined pension, along with other savings and investments, should top the $100,000 a year mark which means you will have a hold of that $1.5 million nest egg that a lot of people strive for.
In fact, it is not uncommon for public employees to realize they can live much more frivolously in retirement than they did while working full time.
If you are considering switching occupations, you are not alone either.
Retire and Live in the Middle-Class
The majority of people are not going to be able to live it up in retirement like those previously mentioned, but they still have the chance to enjoy more than just bare-bones living. Many people aim for enjoying the same comfort they did will working full time, and are more than happy with that. Over time, more and more seniors are pursuing expensive hobbies such as owning vacation homes, traveling, golfing, or skiing. This is a lifestyle that is built more on experience than it is on assets, and that is why many seniors downsize to cheaper cars and smaller homes in order to enjoy more active living.
The average spending of couples over the age of 65 is approximately $40,000 a year, but a very comfortable retirement can cost closer to $60,000 a year.
So how much are you going to need to enjoy an active retirement?
Assuming that you will receive close to $30,000 in a government pension plan, you are going to need to have a nest egg that can handle an extra $15,000 to $30,000 a year. Financial experts advise that retirees need savings that totals 25 times your targeted yearly spending, which means that a middle-class retirement will require retirement savings of around $250,000. If you want to enjoy a little more in your life after work, then a good target is around $750,000 in savings.
There is a big variation between the two, and deciding the amount you want to save will depend largely on how much you want to enjoy life now compared to how much you want to enjoy life in the future.
Retiring with Bare-Bones Standards
While a no-frills type of retirement seems to be the worst-case scenario, it is definitely wise to know what you will need to save in order to survive. This gives you a definite start point in terms of your savings, and will give you the information you need to start building.
A bare-bones retirement entails a lifestyle where a retiree rents their home, does not own a car, and does not possess spare income for nights out, alcohol, or even upgrades such as cable TV. This does not exemplify the retirement dreams of many people, but this lifestyle still affords food, shelter, health care coverage and other essential costs.
The question then becomes: how much are you going to need in order to simply survive?
The good news here is that in many cases you are not going to have to save a dime. A combination of your government assistance as a low-income senior and federal Social Security benefits will ensure that all your basic needs are covered, especially if you live in a smaller city. If yourself and your spouse are over the age of 65 then you will qualify for close to $25,000 a year if you have no other savings or income to speak of.
So basically, the government has made sure that the elderly do not live in poverty, but have really only promised about $1 more than the poverty line.
This is still better then nothing, and it definitely feels good to know that you won’t have to worry about where your next meal comes from, even if your retirement savings plans fall apart.
Meeting Your Retirement Expectations
In the end, it is very important for you to match your desires with your actual means. If you are like most people, and are not a millionaire, it doesn’t mean that you have to give up on your lofty aspirations for retirement, but you have to remain realistic. Find variations of what you dream of that are less expensive. For instance, if you lay in bed dreaming of your luxury vacation home in the South of France, consider a rental condo in a more affordable locale.
On the other hand if you know your savings plans just aren’t shaping up, it is not uncommon for a lot of retirees to work part time. Even three days a week as a consultant or as a business manager can make an incredible difference on your retirement bottom line, and can be the difference between three basic meals a day and dining on succulent cuisine in Europe.
Retirement savings is important, but it can be a lot simpler than you first imagine. Consider what type of retirement you are after, set realistic goals, and set out with a plan of action. With a few smart decisions and an attainable goal, you may realize that your retirement dreams are not nearly as far off as you thought.
And if some of the figures in this article brought you back down to earth, at least you know now before it is too late.
This article is contributed by Steven, he is a professional personal finance journalist. He is a contributor for several personal finance web sites. His work has been mentioned in and linked to from, USA Today, The Huffington Post, Benzinga, Investopedia, The Wall Street Journal, and other publications. Make sure to subscribe to his Credit Zeal blog.
Amit,
This is a great article that helps educate and give financial peace to every person or couple who has a different financial situation in life regarding retirement. Thanks for sharing your thoughts! Well done sir!
It's important for people to understand the bigger picture if possible before they retire and even if they are close to retiring to at least know what to expect with the bare minimum in retirement and what that looks like. The financial and retirement planning landscape has changed quite a bit today and continues to change so understanding what it takes to live a comfortable retirement life style is important. Thanks for sharing!
It's no wonder that a recent survey showed a third of people in the USA have nothing saved for their golden years. "Retirement is a big stew, and there are so many ingredients that you don't know how the recipe is going to come out
Isabella – KendallCapital.com