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Is Your Retirement Budget Realistic?

By Kailey Hagen – Sep 29, 2019 at 2:15PM

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Your best guess is almost definitely wrong.

When it comes to something as important as calculating your retirement expenses, the worst thing you can do is take a shot in the dark. But unfortunately, that seems to be the favored strategy among most Americans. If you figure too high, you could end up saving more than you need and working longer than you have to. Underestimating your retirement expenses is even more worrisome because it could threaten your ability to put food on your table and keep a roof over your head in your golden years.

It's a more common issue than you think. A Transamerica survey found that most workers estimate they'll need $400,000 to $500,000 to cover their retirement expenses, while the true costs are likely to exceed $1 million. Here's a closer look at the real costs of retirement and how you can create a tailored plan to help you save enough.

Two older people looking at a paper

Image Source: Getty Images

How much will retirement cost?

There are a number of "rules" out there about how to estimate your retirement costs -- like the rule that says you should multiply your desired income by 25 -- but none of these rules apply universally to everyone. If you want a truly accurate estimate of your retirement savings, you have to throw all of that out the window and start from scratch.

You can't know exactly how long your retirement will last, but you'll have to estimate it to determine how many years of living expenses you need. The average 65-year-old retiring today has a one in three chance of living past 90 and a one in seven chance of living past 95, according to the Social Security Administration, so figure high to be safe. Subtract your preferred retirement age from your estimated life expectancy to figure out how many years your retirement will last.

Next, calculate your approximate annual expenditures in retirement, bearing in mind that some costs you have now, like child care, might decrease or disappear, while other costs, like healthcare, will rise. The average household headed by an adult 65 or older spends about $50,000 per year, according to the Bureau of Labor Statistics, but you could spend more or less than this.

Multiply your average annual expenditures by the number of years of your retirement, adding 3% annually for inflation. If you're using a retirement calculator, it should do this for you. It'll also ask about your estimated investment rate of return. While this could be as high as 7% or 8%, use 5% to 6% to be conservative. Your calculator should then give you an estimate of how much you need to save per month and in total to have enough in retirement.

It's likely this amount will exceed $1 million and could be closer to $2 million, based on the averages listed above. But you don't have to save all of this on your own. Social Security and your employer 401(k) match, if your company offers one, will help cover some of your retirement expenses. Subtract these from your target savings goals to figure out what you have to save on your own. If you don't know how much to expect from Social Security, create a my Social Security account to find out.

Sticking to your plan

Now you have an accurate retirement savings goal, but that doesn't mean anything if you aren't sticking to your plan. Aim to save at least as much as your retirement calculator tells you to each month, and if you can't, take steps to correct this. You might have to cut back on discretionary purchases or work a little extra to free up cash for your retirement savings. Keep in mind that if you can't save as much as you'd like to right away, you might need to set aside a little more per month in the future in order to have enough.

If you still can't save enough, modify your retirement plan until you find a solution you're comfortable with. You might have to delay your retirement by a few months or years to give yourself more time to save or plan to reduce your expenses in retirement so you can get by with a smaller nest egg.

Consult with a financial advisor if you're struggling to come up with a workable solution on your own. He or she may be able to suggest some ideas you hadn't thought of. Just make sure you choose a fee-only advisor and not a fee-based advisor who earns commissions. This could cause them to recommend investment products that don't suit you so they can earn a profit.

The sooner you begin planning for retirement, the easier it is to make smaller corrections as needed. If you wait until retirement is almost upon you, it takes more drastic changes to shore up your retirement savings.

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