We all dream about the luxury of retirement. Traveling, spending time with your loved ones, going on hikes, and joining reading clubs… Yet, what is the real retirement cost estimate? Turns out, it’s surely more than what you’ve already saved.
Retirement Cost Is Highly Underestimated
How much does one need for their retirement plans? Sadly, retirement cost might just be a lot more than people usually estimate. Dan Ariely, a professor of behavioral economics at Duke University, said that an ideal retirement costs a ton – Americans don’t understand that as long as they are at their office jobs. Aging, though, includes new hobbies, traveling, and fresh spending habits. “If you’re in retirement, every day is like the weekend. Every day is expensive. You want to do things. Very few people just want to go fishing and walking in the woods,” Ariely explained. Most people have to save over 75% of their salary for the fund. So, how does one estimate their future spending habits? That depends on the created retirement budget and goals.
While some expenses will definitely subdue, others might go up a lot. Be it alone or with a financial advisor, anyone can turn their guesses into a detailed retirement cost plan. Steve Feinschreiber, senior vice president of Financial Solutions at Fidelity, said that the standard of living peaks in the mid-50s. “Fortunately, many people who have saved adequately for retirement can fulfill their dreams because their overall expenses are generally reduced in retirement save one important category—health care,” he added. Start with an annual income – for most, only 20% of the income goes to the savings category. So, if you make $45,000 annually, you’ll spend around $36,000 every year in retirement.
Counting the Closest Estimate
Next, the 80% estimate will change according to lifestyle and health expectations. Of course, everyone is different in that regard. When one wants to stay home and go on daily walks, others will take trips around the globe and take up professional hiking. Moreover, some will have more health problems as their get older. “That is why it is important to adjust the spending guidelines based on your own needs and wants,” said Beau Zhao, director of Financial Solutions at Fidelity. “Let’s say you plan to travel around the world after you retire. You may want to increase the 80% guideline to 90% or 100%.” The initial estimate might also change based on the size of the annual income. That said, workers with an annual $200,000 may only need 55% of their preretirement income for a retirement fund.
“To get a sense of what you might need to fully cover your expenses, look beyond the 80% starting point. Try to narrow the range between 55% and 80%, factoring in your income, and then adjust your likely replacement income rate to get your number,” says Zhao. Now, to the housing costs – don’t overestimate them. Most retirees move to a cheaper location or downsize. Instead, put more money into healthcare. According to Fidelity, an average 65-year-old couple will spend about $300,000 for the whole retirement. Surely, some will have to spend even more.
So, count your perfect retirement cost based on plans and goals, housing costs, and health concerns – chronic illnesses, longevity, and long-term care.