My husband and I are in our late thirties, and we're not sure how much we should be saving for retirement. How can we estimate what we'll need and how much we should be putting aside each year to cover it? We both want to retire in our sixties. — Stephanie, Virginia
Many people spend as much as one-third of their lives in retirement. In order to live comfortably during this time, the general rule is that you’ll need at least 75 percent of your current annual income to cover your expenses. However, the best and most conservative way to plan is make sure you can cover 100 percent of your current expenses throughout retirement.
To formulate a retirement savings plan, first think about your current expenses and how they may change after you retire. While many expenditures you face during your career, such as work-related expenses and the cost of raising kids, won't be around after you retire, medical expenses can be staggering. For many Americans, health care is likely to be one of their largest retirement expenses. Fidelity Benefits Consulting estimates that a 65-year-old couple retiring this year is estimated to need $220,000 to cover medical expenses throughout retirement.
The following categories will help you estimate your other retirement expenses:
- Real estate: mortgage payments, real estate taxes, insurance, maintenance, second home costs
- Utilities: electric, gas, water, trash, phone, cable/satellite/Internet
- Vehicles: loan payments, insurance, license, maintenance
- Health care: medical insurance, out-of-pocket costs, prescriptions, eyeglasses, vitamins, Medicare, eldercare expenses, long-term care premiums
- Personal care: toiletries, cosmetics, haircuts
- Food: groceries, restaurants
- Clothing: clothes, laundry, dry cleaning, tailoring
- Vacations: travel, lodging, food, entertainment, souvenirs
- Entertainment: tickets, movie rentals, books, iTunes
- Savings/contributions: charities, education savings for grandkids
- Memberships/licenses: golf or health club, social club
- Miscellaneous: gifts, magazines, newspapers
To guarantee that you have enough income from your investments to cover these expenses, create an ongoing savings plan that you can begin today. Start by maxing out contributions to your 401(k), IRA and other employer-sponsored retirement plan accounts. (For 2013, the 401(k) limit is $17,500 if you’re 49 or younger, and $23,000 if you’re 50 or older. The IRA limit is $5,500 if you’re under 50; $6,500 if you’re over.) Then begin building up an emergency fund, if you haven't already, which can cover 6 months' worth of living expenses. Altogether, you should aim to put a total of 15% to 20% of your annual paycheck toward retirement and savings.
For a more detailed view of how you’re doing, a great resource is the AARP Retirement Income Calculator, which will allow you to determine how much monthly income your retirement savings will provide in your golden years. Of course, you can — and should — also supplement your employee-sponsored retirement accounts with other sources of income, such as Social Security, pensions or any full- or part-time work you take on. You will receive a full report with a year-by-year breakdown of your needed yearly retirement savings and next steps. It is a fantastic tool to start you on the right savings path.
Invest Your Money Wisely
Many people are intimidated by investing, but there are plenty of resources available to help you craft a well-diversified portfolio. The American Funds retirement planning website is a good place to start. Under the Retirement Planning tab, you’ll find easy-to-understand articles about investing basics, retirement plans and savings strategies. You’ll learn about the tax advantages of retirement saving, the value of saving as early as possible, incentives for older and low-income investors and much more.
For additional assistance, look into working with a qualified financial advisor. The National Association of Personal Financial Advisors provides an extensive list of fee-only advisors.
Because life is not static, your retirement savings plan must adjust too. A significant change in your salary, expenses, retirement account balances or your health might impact your odds of meeting your retirement goals. Review your plan each year to ensure that you are on track.
Stacy Francis is president and CEO of Francis Financial, Inc., a fee-only wealth management practice dedicated to investment advisory services for women, couples and those experiencing divorce. She is also the founder of Savvy Ladies®, a nonprofit organization that educates and empowers women to take control of their finances.