People are living longer and spending more time in retirement. In addition, individuals are now expected to ensure their own retirement financial security. It’s no wonder that planning for retirement has become one of the most important financial moves you can make. Think you know how much you need to save? Check your math against the retirement savings factors we recently reviewed.
Back of the envelope
Figuring out how much to save can be complicated and time consuming. Many people may turn to retirement calculators and other online tools and resources.
Retirement calculators can suggest or use “target replacement rates.” This is how much of your pre-retirement income you need in retirement to keep your current standard of living. Most economists and financial planners generally agree that retirees need less money in retirement than while working since they will probably have lower expenses—for example, no more commuting costs.
(Excerpted from GAO-16-242)
Regardless of what the experts say, how much money you’ll need in retirement depends on you. When planning ahead, consider how these 3 expenses can change:
- Housing. Regardless of age, housing costs average about a third of household’s total expenses. Even so, housing costs can change over time—including before and during retirement. For example, paying off a mortgage or downsizing can save you money, while moving to a more expensive area or needing specialized senior housing can increase your costs.
- Health care. Health care costs can go up or down. However, older households tend to spend more on health care than younger ones. In addition, insurance premiums and out-of-pocket costs can change over time.
- Lifestyle. How do you want to spend your retirement? While you may not need to pay for your commute, with more free time you may spend more money on entertainment, dining out, or travel. Retirees may be able to stretch their dollars with senior discounts, but going out can still add up. Or you may choose a simpler lifestyle in retirement, staying in and spending less.
Knowing generally how much you need in retirement can help you plan. But there is no one-size-fits-all target replacement rate. Good retirement saving tools will recognize people’s differences.
In fact, we recommended steps that the Department of Labor could take to help workers better understand replacement rates. The tools the department currently offers do not allow users to adjust replacement rates based on their individual circumstances.
To see what tools are available, what experts recommend, and how the Department of Labor could better help workers plan for the future, check out the full report.