There aren't many silver linings to the COVID-19 pandemic, but a recent Charles Schwab survey may have found one for retirement savers. Roughly 63% of aspiring retirees say COVID-19 has made them more focused on developing a clear financial plan for retirement than they were before. That's not a guarantee that they follow through, but if they do, it could make a big difference in their quality of life in retirement.

If you don't yet have a clear plan for retirement, here's what you need to know to create one. 

Mature couple discussing finances together

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Why you need a written retirement plan

Only about 33% of the aspiring retirees Schwab surveyed said they had a written financial plan for their retirement goals. That leaves roughly two-thirds without a concrete idea of how much they need to save for retirement or how they're going to reach their goal.

You may think you know how much you need without doing all the math, but people's guesses aren't always correct. The Schwab survey found that $920,400 was the mean amount participants had saved for retirement, and many were confident it would cover most, if not all of their retirement expenses. Yet when asked about how much they would need to spend annually to live their best lives, the average was $135,100 per year. In that case, the mean retirement savings would only last for about seven years.

Obviously, most households can get by on a lot less than $135,100 per year, but that just goes to show that people's estimates aren't always right. When you take the time to calculate how much you think you'll spend annually in retirement and how long your retirement will last, you can get yourself much closer to an accurate estimate.

Your written retirement plan gives you a clear savings plan to follow so you can measure your progress toward your goal. If you realize you haven't been saving as much as you ought to have been up until now, you can correct your mistake rather than ending up retired without enough money. 

How to create an accurate retirement plan

You need to know the following things to create your written retirement plan:

  • When you plan to retire
  • How long you think you'll live
  • How much you believe you'll spend annually in retirement
  • How much money you expect to receive from other sources, like a pension, Social Security, or 401(k) match 

Obviously, you can't determine any of these for sure, so you have to rely upon estimates. Just choose when you'd like to retire to start with. You can always adjust this age later if you realize you cannot afford to retire on your chosen date.

Plan to live to at least 90 unless you have a health condition you believe will shorten your life. You don't want to underestimate here because that could cause you to save less than you actually need. It's better to have extra money that you can pass on to your heirs than to have too little and become dependent on your heirs to cover your bills. Subtract your chosen retirement age from your life expectancy to get the estimated length of your retirement.

You can use your current spending as a baseline when estimating your spending in retirement, but think about how your life will change between now and then. You won't have to save for retirement once you're retired, and you may not have to support your children financially any longer, which will reduce your expenses. But you could also have higher medical costs than you're used to, and you may spend more on travel or hobbies since you'll have more free time. Use your best estimates and try to come up with an idea of how much you'll spend annually.

Then you can plug this information into a retirement calculator or multiply your average annual spending by the number of years of your retirement, adding 3% annually for inflation. This will help you estimate the total cost of your retirement, but you won't have to save all of it yourself because your investments will grow over time. Use a 5% or 6% average annual rate of return, though your investments may grow more quickly than this. Your retirement calculator should have a spot to enter this information. It should also tell you how much you must save per month to hit your goal.

From these totals, subtract the money you expect from other sources. Your company should provide you with the necessary details about pensions or employer 401(k) matches you qualify for, and you can create a my Social Security account to estimate how much you'll receive in Social Security benefits. Then you should be left with the amount you must personally save per month.

It's an ongoing process

A retirement plan isn't something you create once and never look at again. Your goals for retirement might change over time. Or you may be able to save more or less in a certain year than you'd anticipated, and that could affect when you can afford to retire.

Revisit your retirement plan at least once per year and whenever you experience a major change to your household finances. Adjust your plan as necessary so you can stay on track for the retirement you want.