‘This is never factored into the equation.’ One big thing people forget to consider when thinking about how much they need to retire

I’m sure you’ve pictured it: on the beach mid-weekday, gently lapping waves falling on white sand, sipping an umbrella drink — and you no longer have to check your email, other than to confirm your dinner reservations. You may even have time for some self-reflection. But can you actually afford that life? 

Indeed, the one question on many of our minds is just how much we need to retire. Unfortunately, if you’re looking for a simple numerical response, most experts will tell you the solution isn’t that easy.  Here are some of the questions to ask yourself before you figure this out.

Question 1: What are my expectations for retirement? 

How much you need to retire depends on your expectations for life in retirement. In other words, before asking yourself how much you need to retire, you should be asking yourself this: What are my expectations for retirement?

Where you live is one of the biggest factors when it comes to deciding how much money you’ll need to account for. Depending on your location and which beaches you plan on lounging on, that cost could steadily rise. Your plans to work in retirement, travel, spend on grandkids, healthcare and hobbies are also just some of the potential factors that could push that number higher, or lower, than you may be expecting. 

For one, it may be worth considering owning a home versus renting in order to “plan for and control inflation to some extent,” suggested Marianela Collado, a certified public accountant, senior wealth advisor and CEO of Tobias Financial in Plantation, Florida. She added that considering the cost of living in another state, or even another country, could positively impact the plan if the cost of living is much lower. “Heck, instead of needing $5 million, maybe it’s only $3 million if it takes half as much money to live outside the U.S.”

Question 2: What’s my ballpark estimate of what retirement will cost?

Of course, that’s a lot to process, so if you just want a back-of-the envelope calculation on how much it’ll cost to retire, some pros suggest a general rule of thumb when building a nest egg is to try to replace somewhere between 70% to 90% of your pre-retirement income over the number of years you plan to stay retired (more on that later). That will vary depending on a number of factors such as the average tax rate in the state you plan on retiring in, whether or not you plan on continuing to generate an income, or even your expected spending habits, according to Caleb A. Pepperday, a certified financial planner with JFS Wealth Advisors in Pittsburgh. 

Still, while Pepperday agrees retirees typically spend about 70% to 80% of their pre-retirement income in retirement, he notes that because of these outliers and more, there is really no magic number for the amount you should have saved. “It depends on a myriad of factors,” Pepperday said. “Someone who is receiving a monthly pension in addition to a 401(k) and Social Security, may need far less than someone who is relying on just Social Security and their 401k assets to get them through retirement.”

Though its efficacy has been debated, another back-of-the-envelope calculation worth doing is examining the 4% rule — a general rule of thumb that suggests retirees withdraw roughly 4% of their savings during their first year of retirement and adjust for inflation every year for the following 30 years. “In general, it is advisable not to withdraw more than 4% each year from your retirement portfolio if you don’t have to,” Pepperday says. “For example, if you expect to spend $75,000 a year and Social Security is providing $35,000 of this income, you would need roughly $1 million to produce the remaining $40,000, assuming a 4% withdrawal rate.”

Once you know all of that, you’ll need to layer in what you learned about your expectations in retirement. Maybe you don’t need 90% of your income, if you plan to outright own a home in a far cheaper place that you live now, for example. And remember: How much money you need is a personal decision that relies on more than just a number and estimates, says Marguerita Cheng, CEO of Blue Ocean Global Wealth.

“The decision doesn’t just depend on financial circumstances but also personal circumstances such as family situation, access to health care, age, sources of income, etc.,” Cheng said. “The number is different for everyone. In working with clients, we want to make sure they have a reasonable amount of wealth, good health and time to enjoy their retirement.”

Question 3: How long should I plan on having the money last?

In 2020, life expectancy in the U.S. was 77, according to the CDC. But pros say that unless you have a compelling reason — like a chronic health condition — to think otherwise, you’ll want to plan to live longer.

Roger D. Oprandi, a private wealth advisor at Ameriprise Financial Services in Miami, says we should plan to live until about 95, and then do this calculation: “I’d start by knowing what your true, committed expenses are; housing costs, food, and other must haves,” Oprandi said. “Annualize the number and subtract your Social Security and other pensions. Divide the difference by 0.04 or 0.035, to be conservative. This isn’t perfect but it’s a good start and an easy calculation,” he added referencing the 4% withdrawal rule.  

Question 4: What about healthcare costs in retirement? 

Christopher Lyman, an advisor at Allied Financial Advisors in Newtown, Pennsylvania, says that although clients aren’t necessarily living longer, it does appear that those who do, often do so with chronic health conditions to contend with. “This leads to excess funds being needed for medical specialists, medications, and modifications to your home/purchases to modify the way you complete your daily tasks.” 

To be sure, a couple who is 65 or older can expect to spend around $315,000 on health care and medical expenses throughout retirement, according to a recent study from Fidelity. For single men, that number is roughly $150,000 for men, while women can expect to spend on average $165,000. That doesn’t include if that client wants to move to some type of assisted living facility, according to Lyman. Indeed, Lyman warns that the costs associated with long-term care have often “completely evaporated” estates with $2 million or less in a span of just five or 10 years.

Medical costs ultimately replace a retiree’s annual spending on a mortgage, says Spencer Betts, a certified financial planner, chief compliance officer and financial consultant at Bickling Financial in Lexington, Massachusetts. “Usually while you’re working, your housing costs are your biggest expenses,” says   “That often flips over to health care when you retire.”

Cheng adds that it’s “important to plan for the different phases of retirement, including a long-term care event. Healthcare and long-term care costs do inflate at a faster rate than overall goods and services.”

Question 5: What other kinds of unforeseen expenses and factors should I consider?

Aside from healthcare costs, the biggest factor that is rarely considered is the financial assistance of loved ones, says Tom Balcom, a certified financial planner and founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Florida — in particular, the assistance to adult children and grandchildren.

“This is never factored into the equation and many of my clients are grappling with this issue on an ongoing basis,” Balcom says, adding that it’s not uncommon for an adult child to, “get divorced, lose a job or experience another unexpected event and then they turn to their retired parent or grandparent to offer assistance.”

Other things you may not be expecting to spend your hard earned money on in retirement? Home repairs and dental expenses are among the leading unforeseen expenses, according to research from the Society of Actuaries. Nearly 30% of retirees say home repairs and upgrades caught them off guard, while 25% say dental expenses were much higher than anticipated, according to the report. Other things include the cost of dealing with an illness, fraud or scams, family emergencies and even widowhood.

Other factors beyond costs may also surprise people. Indeed, Betts said many of his clients grapple with just how final the decision to leave a high-paying job for retirement can really be. Once you’ve finally decided to leave the workforce, getting back in can be a challenge, he warned.

“If you’re a manager and you retire next year, and you retire too early, you’re not going to be able to go back and get that managerial role again,” he said. “We see it constantly. That’s one of those things where when you’re ready to retire, it’s an irreversible decision. Making sure that ‘yes, I am going to do this and have the money, the resources and the lifestyle,’ is critical.”

Thinking maybe you’ll just go back to work part time to help cover some of the additional costs of your international jet setting? Betts suggests considering doing so as a consultant and to clearly explain what you are willing to do and not willing to do under those circumstances. This can include conversations about potential travel, overtime and mentoring younger employees. It also means that you “would be paid on a 1099,” giving “you and the employer more flexibility on the number of hours you will work and the compensation you will be paid.” However, Betts warns that in many cases, “you typically do not qualify for benefits while being a consultant.”

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