Saving for retirement is tough, but it's even tougher when seemingly helpful guidelines do more harm than good.
It can be difficult to know which rules you should stick to and which you should forget, but when your financial future is on the line, it's important to ensure you're doing everything possible to set yourself up for a secure retirement.
While there's no single correct way to save for the future, there is one outdated retirement rule that could result in a serious lack of savings. Here's how to avoid it, as well as what to do instead.
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How much should you save for retirement?
An oft-cited guideline when preparing for retirement is that you should save enough to cover around 80% of your preretirement income. So, for example, if you're spending $60,000 per year while working, you should expect to need around $48,000 per year in retirement.
While this rule can help you get a ballpark estimate of how much you should save, it's not always accurate.
Some of your expenses will go down in retirement. For instance, you may spend less on things like transportation, dry cleaning, or lunches out at restaurants when you stop working. But you could spend far more on hobbies, travel, or home projects after you retire.
The 80% rule can be accurate for some retirees, but others may see their expenses stay the same or even increase dramatically in retirement. If you're only budgeting for 80% of your preretirement income, you risk burning through your savings far more quickly than you'd planned.
What should you do instead?
Unfortunately, there's no one-size-fits-all approach when it comes to how much you should save for retirement, which is why guidelines like the 80% rule are often inaccurate.
To get the best idea of how much you need to save, it's best to start mapping out as many of your future expenses as you can. Of course, you can't always budget for everything. But you can get a rough estimate to at least determine whether your expenses might increase or decrease in retirement.
To start, think about which costs you won't have to budget for anymore once you retire. Then consider which of your current expenses might increase (such as dining out or home projects). Finally, think about whether there are any costs you may face in retirement that aren't currently in your budget (like hefty healthcare bills or extensive travel).
How will Social Security factor into retirement?
Most retirees will receive Social Security benefits, which can take some of the burden off of your savings. But it's important to ensure you're not relying too heavily on your monthly payments.
Social Security is only designed to replace around 40% of your preretirement income, but as costs continue to rise, benefits are quickly losing buying power. And with potential cuts on the line within the next decade or so, they may be even less reliable.
That said, Social Security can still be a valuable source of income. If you don't know how much to expect, you can check your statements through your mySocialSecurity account to get an estimate of your future benefit amount based on your real earnings.
Once you know how much to expect in benefits, it will be easier to see how much of your retirement income will need to come from your savings.
There's no way to know exactly how much you'll end up spending in retirement. However, by estimating your future costs the best you can, you'll have a much more accurate idea of how much you'll need to save to retire comfortably.
