6 Factors Will Decide How Much You Need to Save for Retirement

1. Retirement Goals

Everyone’s goals for retirement are unique, so depending on what your goals are -- travel, spending time with family, philanthropy, a home on the coast, etc. -- your plans are less about endlessly building wealth, and more about building wealth to support your goals.

Maybe you’re not sure what retirement looks like yet. You’re not the only one. Deciding what to do in retirement can feel daunting and despite your best intentions, how you plan for it may not be how it turns out. Fortunately, a customized financial plan isn’t ruined if you change your mind, and instead gives you the peace of mind to feel comfortable doing exactly that.

2. Inflation

If the past few decades serve as any indicator, inflation rises at an average rate of 2.46% annually. For most of us, inflation is not enough to notice with any kind of shock from year to year - it’s only when we notice how it has compounded over a period of time that you can realize ultimately adds up to 102.46%. In other words, something you bought in 1990 for $100, now costs a little over $200.

The main thing you want to know about inflation and how it figures into your financial plan is that it needs to be accounted for. Many people find themselves on a fixed income for the duration of their retirement, and while that doesn’t mean financial insolvency, it's not ideal with combating rising inflation. 

3. Cost of Living

Where you chose to retire can have huge implications for your financial plan, and how you want to spend your retirement.

As in inflation rises, so too does the cost of living, though the two are not directly connected. Cost of living varies from city to city and is generally considered to encompass basic expenses like housing, food, taxes, and healthcare. The estimate is tied to average wages in the specific area in which you live, which is why places like New York City can seem unsustainable, and places like Kansas City, Missouri undervalued. 

4. Health Care Expenses

Two factors can impact healthcare expenses in retirement: age and cost of healthcare. Are you prepared to handle the shifting tides of both? As you get older, you will naturally need more attention and care when it comes to your health. Once you reach 65 and qualify for Medicare, that can help alleviate some of out-of-pocket costs, but won’t cover it completely. 

Location may play a part in healthcare expenses as well, as states like Massachusetts, Utah, and Idaho pay among the least for healthcare premiums, while states like Nebraska, Iowa, and West Virginia, pay among the most.

When you’re creating your financial plan, it’s wise to hedge against healthcare costs going down, in fact, you can almost count on them continuing to rise - with some estimates averaging about a 5.5% increase, every year. Because healthcare is rife with uncertainty (How much will I need? When will I need it? What will it cover?) - it’s best to consider the advice of a seasoned financial planner before committing any amount of money toward current and future healthcare.

5. Social Security

Social Security was signed into law in 1935, when it was decided that unemployment, illness, disability, death, and old age were threats to one’s economic security. Our modern system was based on recovery ideas in the post-Civil War era, and came on the heels of one of the United States’ worst economic eras, the Great Depression. 

In the twenty-first century, Social Security is considered as “nice to have” - and 97 percent of the elderly (aged 60 to 89) either receive Social Security or will receive it, according to Social Security Administration estimates. How long you were in the workforce and what you made (or, what percentage you paid in) will all factor into what amount you actually receive, but the average payment is somewhere around $1,514 a month, or $18,170 a year. Compare that estimate to your former or current salary and you’ll understand the vast changes you may need to make if you’re relying on Social Security alone.

Additionally, Social Security benefits are available beginning at age 62, but the longer you wait to begin drawing, the more you may receive. If you’re hoping Uncle Sam will save you, personal finance expert and radio show host Chris Hogan discourages that belief and frequently encourages listeners to “grab your own cape”.

6. Lifestyle

Changing your lifestyle is tough, especially for those just entering retirement. In fact, the Institute of Economic Affairs found the likelihood that someone will suffer from clinical depression goes up by about 40% after retiring. Your transition into retirement doesn’t have to be stressful if you’re willing to put in the work, consider advice from financial professionals, and trust in the process.

Hopefully, the process of creating your financial plan will have given you time to think about what you might do in retirement, whether to finally buy that dream home, or travel often, or support your grandchildren, if you choose to. It’s important you (and your spouse, or significant other) consider these decisions together, so you’ll have no regrets. Think of it less as homework, and more like dreamwork. 

Making decisions about your financial future is not always easy but how you choose to live your later years will determine the longevity of your wealth. Conversely, how much you have saved may determine your lifestyle for you. Don’t be caught off guard by the realities of retirement, a financial advisor can get your accounts prepared so you have choices in retirement, not situations you’re stuck in.