Countless workers look forward to retirement, but for many, the thought of leaving the workforce for good is a major source of anxiety. If you're feeling unsettled about retirement, here's how to make sense of some of the questions that may be floating around in your head.
1. How much money will I need to retire?
One of the most stressful aspects of retirement is not knowing how much money you'll actually need. After all, there are many different factors that will ultimately dictate the amount of income you'll require, and if you're a good 15 or 20 years away from retirement, it's hard to say what your living costs will look like so many years in the future.
What you can do, however, is read up on what seniors are spending now to get a sense of what you might be looking at down the line. For example, currently, the typical retiree spends about $15,500 per year on housing, $6,800 on transportation, and $5,500 on food. While these costs might easily climb over time, if you apply a 3% annual rate of inflation (a fair assumption based on past data), and multiply that by the number of years you have until retirement, you can come up with your own ballpark estimates. From there, you can begin to work up a retirement budget that will give you a savings goal to aim for.
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Another thing to look closely at is healthcare, especially since it can end up being your single greatest expense in retirement. HealthView Services, a provider of cost-projection software, recently ran some numbers and found that the average healthy 65-year-old couple today can expect to spend $377,000 on medical care in retirement. Younger couples, however, are likely to face even higher costs. In fact, a 55-year-old couple today might pay as much as $466,000 for healthcare in retirement, while a 45-year-old couple might spend a whopping $592,000. These numbers aren't meant to frighten you but rather to make you aware of the costs you might be looking at down the line.
2. When should I start taking Social Security?
There are different strategies you can employ with regard to Social Security, but yours should ultimately boil down to what you expect to do with that money. If you're confident you'll have enough savings to get by without Social Security, you might take a different approach to filing than someone who's desperate for cash.
But before you can even begin to think about developing a Social Security strategy, you'll need to understand the implications of filing at various ages. In a nutshell, your Social Security benefits are calculated based upon how much you earned during your working years. If you first file for Social Security at your full retirement age (which is either 66, 67, or somewhere in between, depending on the year you were born), you'll collect your base benefit amount in full. If you file at 62, which is the earliest age you're eligible to collect benefits, you'll slash your payments for life. Wait until age 70, on the other hand, and you'll boost your payments by 8% for each year you hold off past your full retirement age.
While there's no single right age to start taking Social Security, playing around with different scenarios can help you arrive at a decision. Keep in mind that your health can, and should, play a role in your strategy -- the reason being that if you don't expect to live a very long life, you may be better off claiming Social Security as soon as possible to get the highest possible lifetime payout. On the other hand, if you expect to live well into your 90s, waiting can certainly pay off. Though it may be uncomfortable to contemplate your own mortality, doing so can really help guide your approach.
3. How many years of retirement should I plan for?
Just as it'd be helpful to know exactly how much money you'll need in retirement, narrowing down the length of your retirement would allow you to save accordingly. But while you can't predict the future, you can use current data to get a sense of what your life expectancy might look like.
According to the Social Security Administration, the average 65-year-old man today will live until age 84.3, while the average 65-year-old woman will live until 86.6. Meanwhile, one in four 65-year-olds will live past age 90, and one in 10 will live past 95.
Again, here's where your health is apt to come into play. If you have a known medical condition or a family history of dying young, then, unfortunately, you might not live as long as the typical American. But if you're healthy and have no reason to suspect an early demise, you can use this data to estimate the retirement period you might eventually be looking at.
4. What's the best way to save for retirement?
Here's another question where there's really no single correct answer. There are lots of different ways to save for retirement, but if you really want a shot at meeting your goals, your best bet is to start as early as possible and build a nest egg using a tax-advantaged account, like an IRA or a 401(k). The benefit of traditional IRAs and 401(k)s is that the money you contribute not only goes in tax-free, but gets to grow on a tax-deferred basis.
Roth IRAs and 401(k)s offer some additional benefits. Though Roth contributions are made with after-tax dollars, your money gets to grow tax-free, and your withdrawals won't be taxed in retirement. Traditional IRA and 401(k) withdrawals, by contrast, are taxed as ordinary income. If you're torn between a traditional retirement account and a Roth, think about whether you expect your tax rate to be higher now or during retirement. If you anticipate the latter, then you're better off saving in a Roth and taking taxes out of the equation later on.
Either way, be sure to get some money into a retirement account sooner rather than later. If, for example, you manage to consistently save $400 a month for 30 years, and your investments generate an average annual 7% return (which is just below the stock market's average), you'll be sitting on $453,000 in time for retirement. On the other hand, if you only give yourself 20 years to save, all other things being equal, you'll have just $197,000 -- a decent chunk of cash in its own right, but less than half of what you'd accumulate by starting 10 years earlier.
No matter how old you are or what your future plans entail, it's never too early to start thinking about retirement and developing a picture of what it might look like. The more actively you plan for retirement, the better your chances of ultimately enjoying it to the fullest.
