There's always some uncertainty in retirement planning, because you never know what the future holds. But you can get a pretty good idea of how much you need to save as long as you have accurate estimates on a few key retirement stats, like how much you plan to spend in a year or how long you think your retirement will last. But if you get any of these key numbers wrong, they can throw your whole retirement plan off.
It happens more often than you think. A recent TIAA study found that more than three in five workers messed up a critical retirement literacy question: What's the average life expectancy for a 60-year-old man and woman in the U.S.? Read on to find out if you're one of the few who got it right.
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Here's the truth
An accurate estimate of your life expectancy is one of the most critical components of your retirement plan. Without this information, you won't know how many years of expenses you need to cover. Overestimating could force you to work longer and deprive yourself of more money during your working years than is necessary. But that's nothing compared to underestimating.
Underestimating your life expectancy could cause you to be too optimistic about your retirement plan. You could burn through your savings more quickly than you anticipated, leaving you with debt or at the mercy of family members to help you through your final years. Or you may have to come out of retirement so you can supplement your dwindling savings with a paycheck.
You probably can't eliminate this risk entirely, but you can reduce your odds of running out of money prematurely by accurately estimating your life expectancy. Averages can be a great place to start.
The average 60-year-old male in the U.S. can expect to live an additional 23.1 years, according to the Social Security Administration, while the average 60-year-old female will live an additional 26.2 years. You can use this as your baseline, but don't forget to make corrections based on your personal and family health history.
Someone with unhealthy habits like smoking or a family health history of terminal illness may not live as long as someone without these risk factors. In this case, it might be safe to plan for a slightly shorter life expectancy. But if you anticipate high medical costs, you can't forget to budget for these in your retirement plan too.
If you consider yourself a fairly healthy person, it doesn't hurt to be a little more optimistic about how long you'll live. You can estimate a life expectancy that's a little above the average if you want to reduce the risk that you'll burn through all your retirement savings. If you don't end up using it all, you can always pass the extra money along to your heirs.
Making the necessary adjustments
If your life expectancy estimates were pretty spot-on to the answers above, congratulations. You may not have to make significant changes to your retirement plan if you already planned to live until your mid-80s. But if you were way off base, especially if you underestimated your life expectancy, now's the time to course correct. The longer you wait to do so, the more difficult the task will become.
Return to the drawing board if necessary. Estimate how many years you'll spend in retirement and how much you'll spend annually. Don't forget to factor in inflation as well -- a good rule of thumb is 3% per year.
If you'd like, you can use a retirement calculator to help you estimate how much you need to save per month and overall to reach your goals. Some even enable you to enter your estimated monthly Social Security benefit so you can figure out how much you'll need to come up with on your own.
Once you know approximately how much you need to save, see if you can adjust your monthly retirement contribution. If that's not possible, you might have to rethink your budget or your retirement timeline. Delaying retirement may not be ideal, but it'll give you additional time to save while reducing the total cost.
Explore a few scenarios until you find a plan that works for you -- for now. Then, look it over every year or two to make sure you're still on track. If your financial situation or life expectancy changes, update your plan again. Small changes annually will reduce the need for big changes on the verge of retirement.
