Keys to Living Your Best Retirement

One of the biggest questions that we get as retirement planners is “How much do I need to retire?” Like many of the questions we get when it comes to planning for retirement, the answer to this one is, it depends. We are all unique individuals and have our versions of what “retirement” will look like. Some people will want to be world travelers, while others may decide to focus more time on a hobby that they enjoy or even pursue new hobbies. Others will be completely content having more time to enjoy being with their friends and family. Even others may decide to continue working part-time at a job that they enjoy. As you can imagine, the amount that each of these people would need to save to live comfortably could be extremely different.

Many people will say they can never retire, or at least afford to retire because they have not taken the time to really understand how much they are actually spending monthly, and what kind of nest egg they would need in order to meet their monthly income needs. So, how do you figure out how much you’ll need to save for retirement? Well, a good starting point for pre-retirees to target for retirement income is 70-80% of your pre-retirement income.

For example, if your current household income is $100,000 after taxes, then you might be looking to create about $80,000 of income (after taxes) in your retirement. Some of that income will likely come from Social Security; perhaps a pension, perhaps spousal part-time income; perhaps some rental income; and then the rest from your investments which is likely comprised of IRAs and after-tax accounts.

Another good exercise to see what you are truly spending is to look at your checking account for the last 6 months or so and see what has come in (paycheck, rental income, etc.) and what has gone out. Be sure to note which expenses are more “fixed” (utilities, groceries etc.) and which ones are more “discretionary.” Typically, people would like to live a lifestyle in retirement that is similar or maybe even a little better than the one they live while they are working. So, although going out to eat may be considered a “discretionary” expense prior to retirement, many people would like to continue to do this in retirement. Therefore, a real understanding of what your current lifestyle is costing monthly is really helpful.

Once you know what your lifestyle costs on a regular basis, you can then begin to formulate how much you would need to save into your retirement and investment accounts to make up for your monthly expenses that will not be covered by more traditional retirement income streams. (Pensions, Social Security, Earned Income, Rentals, etc.)

When you look at your monthly budget, you will also begin to see areas where you can make some adjustments, if you need to, with regards to spending less or saving more starting today!

Let us look at some common steps you can take with regards to saving more or spending less.

1. Debt: Bring down or eliminate debt as fast as possible, especially credit card debt. Also, be careful paying for college or cosigning on student loans for children. While your children can finance college with loans, but you cannot finance your retirement with loans. You can always help them pay their student loans off down the road if you would like to.
2. Saving more: Once you have your debts under control, (ideally paying off everything except for a mortgage) you can then look at saving more money into your retirement accounts. (401k/403b, IRA etc.) Remember that in 2021, you can save up to $19,500/yr into your 401k/403b if you are under age 50 and this jumps to $26,000 once you are over age 50. If you do not have an employee sponsored plan to save into, you can contribute to an IRA with earned income with the contribution limits currently set at $6,000 if you are under age 50 and $7,000 over age 50.

Another common question that comes to mind is should you pay your mortgage off before you retire? Ideally, yes, it is a great idea to have your mortgage paid off before you retire. There are a couple reasons for this:

1. For many people, their mortgage is one of their largest monthly fixed expenses. If this expense is gone, it frees up a significant amount of cash flow each month.
2. Paying off any liability with any interest expense on it is like making an investment for yourself. What we mean by this is that you are not paying that interest to anyone, it stays in your pocket.
3. For example, if your mortgage has a 4% interest rate on it, you are automatically “costing” yourself 4%/yr on that money. By getting rid of that 4% interest rate, you are now “making” (saving yourself) 4% on that money with no management fee and no stock market risk.

Starting retirement with little or no debt is a wonderful position to be in. Since your fixed expenses are likely rather low, you probably will not need to take as much from your investments to maintain your lifestyle. This also gives you a lot of flexibility when it comes to spending on things that matter to you. When you have very little stress for monthly bills and enough flexibility to do the things that are important to you, you are on a great path to living your best retirement.