For many Americans, retirement will last decades. Being prepared is essential, and there's a lot that goes into a successful retirement plan.
But according to research from Wells Fargo, three key issues stand out above the rest in what Americans believe is most important when preparing for their later years:
1. Making your savings last
For half of all Americans, ensuring a retirement nest egg lasts for life is a top concern. This makes sense, because running out of supplementary savings would leave retirees dependent on Social Security alone, and these benefits don't provide enough to live on.
There are two keys to making sure your savings last:
- First, make sure you have a large enough retirement account so it can produce sufficient income without your investments running dry.
- Second, decide on a safe withdrawal rate and stick to it so you don't end up taking out too much money.
There are different ways to set your retirement savings goals, and several different approaches to setting a safe rate of withdrawal, including limiting your withdrawals to 4% of your account balance in year one of retirement and then increasing them annually to keep pace with inflation.
If you know how much income you need your savings to produce and know you want to follow the 4% rule, one of the simplest options is to multiply your desired income amount by 25. So if you want your investment account balance to give you $50,000 in income, you would need $1.25 million.
2. Covering healthcare costs
While not running out of money is a primary concern for most future retirees, covering healthcare expenses is a close second, according to Wells Fargo's research. In fact, 49% of Americans describe this as one of the most important aspects of retirement planning.
Prioritizing this financial issue is a smart move, as healthcare will likely be one of your largest required expenses as you age. In fact, one recent study estimated the price tag for Medicare premiums, prescription drugs, and other out-of-pocket health expenses at $325,000 for a senior couple retiring in 2020.
Paying such a substantial amount for medical services isn't possible unless you've prepared as part of your retirement plan. When setting your retirement savings goals, factor in these costs and either increase the amount you're investing in existing retirement accounts or put money into an HSA if you're eligible.
3. Estimating monthly expenses
Finally, around 41% of Americans believe having an idea of how much retirement will cost is key to a successful retirement plan. This is important because it can both help you set a savings goal and tell you if you're really ready for retirement.
Knowing what your monthly expenses will add up to gives you a clear picture of how much income your savings need to produce. And, as mentioned above, if you determine how much you need to be able to withdraw from your accounts, you can work backward from there to figure out how big your balance needs to be.
If you're nearing retirement, you can be more accurate in your estimate so you'll get a solid understanding of whether your savings will produce sufficient income. In fact, you may even want to try living on your retiree budget to see if it's realistic before giving notice. If you find you can cover living expenses easily with income from Social Security and from your investments (at a safe withdrawal rate), you'll know you're ready.
Make sure you're prepared to retire
Americans are right to focus on these three key issues in planning for retirement. By estimating the cost of healthcare and getting a clear picture of your expenses, you can determine how much your savings need to produce.
Then, the last key step is to determine how much to invest for a nest egg that produces the desired income at a safe withdrawal rate. Check all three of these items off your to-do list, and you're well on your way to financial security in your later years.