A recent survey shows that baby boomers on the cusp of retiring have no idea how much money they'll need in retirement. If you're among them, you're far from alone. Everyone's situation is different, but getting an idea of how much you might end up spending in retirement is a great first step toward making sure you're prepared. Will you have enough retirement savings to be financially secure in your golden years?
Financial planners regularly advise retirees to limit withdrawals from retirement savings to no more than 4% per year. Withdrawing more than 4% can reduce the likelihood that your nest egg will continue growing and increase the likelihood of running out of money during retirement.
However, most baby boomers' retirement accounts are too small for a 4% withdrawal to make much of a difference. According to PwC's Employee Financial Wellness Survey earlier this year, 79% of baby boomers are contributing to retirement saving plans, but 50% of them have saved up less than $100,000, and more than a third of them have saved less than $50,000 for retirement. At a 4% withdrawal rate, that level of savings isn't going to go very far in paying monthly expenses.
Social Security's role
Pensions are increasingly disappearing, and that means that a lot of the heavy lifting in retirement will need to be done by Social Security. In 1980, 38% of Americans were employed by company's offering pensions. However, that's fallen to about 13% of workers today.
Without pensions, baby boomers are going to need to count on Social Security more than ever. That's a problem, though, because Social Security was designed to be a safety net, not a primary source of retirement income. According to the latest figures, the average retired worker receiving Social Security is going to pocket just $1,360 per month in Social Security income in 2017, and depending on other income, some of that may be taxable.
Spending in retirement
Now that we've set the stage, let's dive in and see how much baby boomers can expect to spend in retirement. If the past is prologue, then the Bureau of Labor Statistics data on average spending by age can help paint the picture.
According to the BLS, the average spending by 65-plus households totaled $44,664 in 2015. The two biggest categories for spending were housing and transportation, which averaged $15,529 and $6,846, respectively.
If you're a homeowner retiring without a mortgage, you can reduce those spending figures by the average $1,298 per year spent on mortgage interest and charges. Furthermore, if you don't expect to have a car payment or travel much by car, you can shave a couple thousand dollars more off your spending projections.
Unfortunately, healthcare is another one of the major expenses for baby boomers, and there's not a lot you can do about those costs. Healthcare costs for the average over-65 household is $5,756 per year, including $3,900 for health insurance and another $672 for drugs. If your costs are higher, make sure to adjust your spending projection upward.
Getting on track
If you're a baby boomer coming up on retirement and these numbers worry you, then it's time to make changes. Even small changes in spending can have a big impact on your retirement savings, but only if you take the time to construct a detailed budget of your spending over the past few months so that you can scour it for opportunities.
Bleaching your budget is a great first step, but don't forget to look for cost savings on credit cards, mortgages, and auto loans, too. Expensive debt, such as high-interest rate credit cards, can become less expensive debt using low-interest transfers. Mortgages and auto loans may also offer savings, if you can refinance at lower rates.
It may also be time to start thinking about your living situation. Downsizing ahead of retirement while you're still working can make sense if it frees up money that can be invested.
Also, it's important to remember that budget-mindedness matters most when you reallocate cost savings to tax-advantaged retirement accounts, such as workplace retirement plans or IRAs. Your company's human resources officer can tell you how to boost your contribution to a 401(k) or 403(b) plan. Up to $18,000 can be stashed away for retirement in one of those plans next year, plus another $6,000 can be contributed if you're over age 50. You may not be able to contribute the maximum amount to these plans, but even boosting your contributions by a little bit can lead to a meaningfully bigger nest egg thanks to compound interest (or interest on interest).