Calculating how much you need for retirement can be difficult. Everyone's tastes are different, and your plans during retirement affect how much money you need. However, having a more realistic understanding of how you will spend your retirement years can prevent you from saving too much for your senior years.
Financial Needs Change in Retirement
In general, people's needs change during retirement. The first few years are usually spent completing a wish list – doing things you always wanted but could not do before. These years are where you are apt to spend the most money.
After 10 to 15 years, the desire to travel often lessens. After all, by that time, you can say – "Been there, done that." Your bucket list shrinks, and staying home becomes more attractive. It means you start spending less as you grow older.
The standard advice for saving money for retirement varies. A set percentage of your current income is probably inaccurate. While people with larger incomes may be able to retire on 80 percent of their current costs, someone making $30,000 a year will likely need as much as 98 percent.
Longevity is Unpredictable
Since there is no way to know how long you or your spouse will live, saving money for retirement requires some guesswork. However, you want to be prepared if you live longer than expected. Most people today will not live beyond 85 – a few will live to 95 or more.
Saving for Inflation
Inflation is not apt to be the concern it was once thought to be. However, if much of your income during your retirement comes from Social Security payments, remember that the government gives increases annually – based on inflation. It means you may only need to consider spending an extra 1 or 2 percent – at most – per year.
How You Save Is Important
There are many different ways to save for retirement. You can invest your savings into many instruments, but if you have most of it in a 401(k), you will pay taxes on much of that money when you withdraw it. However, some types are tax-deductible or non-taxable and will enable you to keep more in your pocket.
Taxes on Minimum Withdrawals
Once you reach age 72, it is necessary to start making the required minimum withdrawals – unless you are still working. Nerdwallet reports that you must be sure to withdraw enough annually, or there is a penalty if you do not. The penalty is 50 percent of the money you should have withdrawn if you fail to do so.
Save on Housing Costs
The cost of housing could vary depending on your situation – but it could be your most considerable expenditure during your retirement years. Housing costs are often between 30 to 35 percent of your income. But, of course, if your mortgage is paid off when you retire and you plan on living in your home for many more years, you will need to save much less.
Working Longer Means Less Is Needed
If you continue working after you reach retirement age – even part-time – fewer savings are needed. Instead, the additional money could be used to have some fun before you give up the job.
Saving for retirement can be complex. There are many considerations when it comes to taxes. Let our experienced advisors help guide you along the way. Contact us today.