Whether you're new to the workforce, midway through your career, or gearing up to leave the working world for good, you're no doubt aware that to retire comfortably, you'll need to plan and save in advance. But how much do you really know about retirement? Here are a few important points to help you prepare for that milestone -- and know whether you're ready to pull the trigger or not.
1. You'll generally need 70% to 80% of your former income to pay your bills
Many people assume that they'll manage to get by on half of their income or less once they retire. But that's a lowball estimate that could leave you cash-strapped and unhappy.
Though there's no absolute rule with regard to how much of your former income you should aim to replace in retirement, as a general rule, 70% to 80% is a good goal to aim for. This estimate takes into account that you may not have a mortgage payment any longer, but you'll still have other expenses to grapple with, and that you'll also have more free time on your hands to fill.
Of course, some seniors do get by just fine on 50% of their former earnings, while others need more like 100% to meet their goals and truly enjoy their life. But having this ballpark estimate could change your savings habits for the better.
2. Social Security will replace about 40% of your pre-retirement wages
We just learned that you may need 70% to 80% of your former paycheck in retirement to live comfortably, and most likely, some of that will come from Social Security. But if you're an average earner, those benefits will only replace about 40% of your pre-retirement income, and that's assuming they don't get slashed in the future, which is a very distinct possibility. As such, it definitely pays to focus on funding your 401(k) or IRA during your working years.
3. Healthcare could be your greatest expense
Many seniors are caught off-guard by the cost of healthcare, so it may help (and scare) you to know that as per Fidelity's latest estimates, the typical 65-year-old couple retiring this year will spend $295,000 on it throughout retirement. That doesn't include long-term care, though, which most seniors end up needing.
While padding your retirement savings will help you better absorb the cost of healthcare later in life, another good bet is to contribute to a health savings account during your career, assuming you're eligible. To qualify, you must be enrolled in a high-deductible health insurance plan, the definition of which changes from year to year. With an HSA, you can contribute funds tax-free (like a traditional 401(k) or IRA) and then withdraw them immediately for healthcare expenses, or carry that money forward into retirement and use it when you might need it the most. You can take HSA withdrawals tax-free when that money goes toward qualified healthcare expenses like Medicare premiums, deductibles, and copays, to name a few.
Get your retirement facts straight
The more you know about retirement, the more likely you'll be to plan well and then enjoy that period of life. Keep the above points in mind and use them to guide the decisions you make with regard to your preparations.