Calculations are based on a set of income replacement targets for estimating the retirement income need. Tip: Our research suggests if you plan an active lifestyle in retirement, ratchet up your overall retirement budget by 6 percentage points compared with a less active lifestyle-a difference that would equate to tens of thousands of dollars in savings at the time of retirement.ġ. What they may not realize is that their own travel plans could eat up just as much of their savings," says Zhao. "We often hear about people who are worried about the stock market taking a chunk of their savings in the first few years after they stop working due to market volatility, asset allocation, or poor market performance. Or if you are looking ahead to enjoying the simple life, this number may be significantly lower. If you're a jet setter who plans to see the world or take up new activities, expect to ratchet up your income replacement rate significantly. These decisions have a big impact on your bottom line. But increasingly people want to tap into their savings to create a more active lifestyle that includes travel, adventure, and new activities.
You might choose activities that are relatively easy on the wallet, such as spending more time with grandkids, reading, or gardening. Lifestyle is another big factor to consider in estimating how much you will spend in retirement. Your lifestyle choices can impact your bottom line You may want to increase the 80% guideline to 90% or 100%," he adds. "Let's say you plan to travel around the world after you retire. That is why it is important to adjust the spending guidelines based on your own needs and wants. "The amount of time until you retire, spending habits, travel plans, health conditions, and unexpected costs can all vary dramatically. "Each family's retirement situation is different," says Beau Zhao, director of Financial Solutions at Fidelity.
Think about this 80% figure as a good jumping-off point, and then use your income, anticipated lifestyle, and health expectations to modify your number to help you generate an even more relevant estimate of retirement expenses. So, for example, if your estimated preretirement income is $45,000, plan on spending about $36,000 annually in retirement. If you know what your annual income is today, you can start the planning process by assuming you'll spend about 80% of the income you will be making before you retire every year in your retirement-that's known as your retirement income replacement ratio. We recognize that, so we've taken the approach of looking at what people can generally afford in retirement based on their preretirement income. Many simply don't do any budgeting at all-not even trying the "back of the envelope" method. The 80% rule provides a guideline of what you can afford in retirementįor many people, budgeting and estimating future spending is something that they find difficult and tedious. "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." "When estimating the cost of retirement lifestyles, most people seek to maintain their standard of living, which generally peaks in your late 40s to mid-50s," says Steve Feinschreiber, senior vice president of Financial Solutions at Fidelity. Then you can turn your "guestimate" of retirement expenses into a detailed retirement income plan either on your own or with an advisor. How will you really know the extent of all these expenses before you enter retirement? The good news is this task gets easier the closer you get to retirement if you've already created a retirement budget and explored what your lifestyle will be like in retirement. Some of your expenses will go down, but others may actually go up. One of the biggest and most baffling questions you'll likely face is determining what kind of a retirement lifestyle you can actually afford.
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