How Much Do You Actually Need For Retirement Settlement?
When it comes to saving for retirement settlement, many families tend to go by the 70% rule: replacing 70% of your pre-retirement income while in retirement in order to maintain a financially stable standard of living. This common rule derives from the idea of replacement ratios–a concept that has been studied and scrutinized by retirement and health solutions firm, Aon, as well as researchers from Georgia State University. Although the most common percentage that families implement is 70%, it shouldn’t be the magic number for everyone. Each person’s financial status is different from one another, therefore, the replacement percentage for each family will be different as well. In most situations, the percentage is based on spending data, previous salaries, money that’s been saved, and other factors. Additionally, most replacement percentages are based on calculations of household spending data from the Department of Labor’s Consumer Expenditure Survey (Source).
With that being said, many families who are close to retiring may be looking replacement percentages of 80-90% depending on their incomes. However, for families with lower incomes, there’s the possibility that Social Security checks will be able to assist them during their retirement, while families with higher incomes will have a full dependency on their savings during their retirement years. As you can see, when determining a proper savings plan for retirement, there are many factors to consider, which is why the 70% replacement rule doesn’t exactly work for everyone. So, without using the replacement percentages, how does a family properly determine how much money is necessary for a financially fruitful retirement.
Determining How Much Money You Need For Your Retirement Savings
Although the replacement percentage rule (with a proper percentage) is a great start to your retirement fund, it’s wise to start compiling together common retirement expenses and then determining a proper budget that will cover the expenses while giving you enough wiggle room. The last thing anyone wants to do is wipe out their nest egg they worked so hard to build; a proper budget and plan for retirement can help to successfully avoid that.
When creating a budget, the most important thing you can do is conduct as much research as you can in order to determine common retirement costs and income needs–even if it means planning for the unexpected. According to a survey conducted by LIMRA Secure Retirement Institute, they found that more than a quarter of recent retirees listed that their retirement costs were much higher than they had originally anticipated. With that being said, ample research is highly necessary in order to create a budget that will work for all of your retirement needs.
Sometimes, families find it helpful to look back on their previous spending and tweak their budget to match their common spending patterns. Additionally, it’s important to determine the type of retirement lifestyle you want to live. Are you planning on traveling frequently? Are you going to downsize? Will you be taking part in luxurious activities? All these questions are important to consider when coming up with an appropriate budget for your retirement. Also, it’s pertinent to take into consideration any health care cost that might come up during your retirement years. Unfortunately, health care costs can do the most damage to retirement budgets due to their highly expensive nature.
Your retirement is supposed to be a time a great relaxation and ease, not filled with financial stress. By taking the time to research retirement costs and make a proper budget, you will be guaranteed to have a financially stress free and relaxing retirement ahead of you.