When do you plan on retiring? When I ask this question during financial wellness workshops and webinars, I find that most people have at least a ballpark idea of when they would like to have the freedom to quit work. In fact, some people completely light up with a lightning fast response of “yesterday, today, or tomorrow” when I ask about that desired retirement date. For most of us, retirement is a top financial priority and there can be a difference between “desired” retirement dates and the actual realistic target date for retirement. Regardless of what your vision of the ideal retirement may look like, here are five basic questions that should be at the heart of all retirement planning activities:
What do you look forward to the most during retirement? This is a question that helps us frame what our desired retirement actually looks like. Unfortunately, I have worked with too many people who didn’t take time to really think deeply enough about this important question. If you are like me and retirement seems too far off to envision clearly, just think about the things that you currently enjoy spending your time doing but would love the opportunity to devote more of your time and resources toward.
Try to go beyond basic answers here and be as specific as possible (i.e., think SMART goals). How often do you plan on traveling? Where do you plan on living? Will you be taking on new hobbies or recreational activities that have some expenses associated with them? Will you be spoiling the heck out of grandchildren and want to have some extra money for them?
How long will my retirement last? This question is simply a pure assumption of how long you plan on living. It isn’t always the easiest question to address, but the reality is that life expectancy plays a major role in our retirement planning projections. The longer we live, the greater the costs of retirement.
An average couple retiring at age 65 has a greater than a 50% chance that one person will live beyond 90. Before you can estimate how many years you will spend in retirement, you obviously need to figure out when you want to retire. If you are just not quite sure the age that works best for you or your retirement date is a moving target, you can use a few different retirement scenarios to compare your options for each realistic retirement date. I always suggest using a realistic (but optimistic) life expectancy but personalize your assumptions based on your own health and wellness history as well as your family’s history of longevity.
How much will retirement cost? The best approach is to start anticipating whether you plan on simply trying to maintain your existing standard of living or not. For anyone within 5 years of retirement, an actual budget plan for retirement becomes more important. Otherwise, the general rule of thumb is to start with around a 70 to 80% income replacement goal and adjust this up or down depending on if you want to live a more active or conservative lifestyle.
That’s because research studies suggest that retiree expenses on average are typically between 70-90 percent of pre-retirement income. Just keep in mind this number is merely a ballpark estimate and reviewing your current and future budget is a more reliable method. A variety of other factors such as your planned lifestyle expenses, future inflation rates, health care costs, and whether or not you will have mortgages and other debt paid off impact the total price tag of your retirement.
How much will I need to save to reach my retirement goals? In order to replace about 80% of your pre-retirement income, you will generally need to save about 10-15% of income throughout your working years. But if you are early in your career or focusing on paying off high interest consumer debt, at least try to contribute up to your employer’s matching contribution if one is provided. Otherwise, run a basic retirement calculation to assess your actual target savings amount to get you on track.
How much of your retirement nest egg can you afford to spend each year? Conventional wisdom among financial planners often relies on a “safe withdrawal rate” of 4% per year. The Rule of 25 is very similar to the safe withdrawal rate. It means that in theory, you need 25 times your first year’s additional income needs for your retirement nest egg.
For example, if I need an additional $100,000 per year in retirement expenses not covered by Social Security, pension, or other income sources, I will need $2.5 million (25 times $100,000) to reach this income goal. This is a general rule and the term “safe withdrawal rate” can be misleading. The key is to remain flexible during your early retirement years as the real safe withdrawal rate depends on the sequence of investment returns and inflation rates during the first 10 years of retirement.
It is no surprise that retirement planning remains the top financial planning priority for about 70% of American workers. The sad reality is that most people spend more time planning a vacation or a major purchase than how they will spend their retirement years or how much it will cost. However, the retirement planning process can be a little less daunting of a task if you simply focus on these five questions.