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Many of us have big plans for our retirement: Travel the world, learn all the hobbies, read every book, move to another country... Add those big plans to the inevitable reduced income, increased free time, skyrocketing medical bills, and other possible emergency expenses involved with aging, and why, again, do we assume we'll spend less in retirement than we do now?
"In some cases, people often need more than the rule of thumb to retire with, as with their increased free time, they need more money in order to fill the void of having a job," says Scott Nelson, the CEO of MoneyNerd. "This could include travel, buying new property, and so on, which requires a larger pension." However, Nelson points out that with increased age comes decreasing energy, so people can also save too much for retirement and never get around to spending it.
Confused? Here, Nelson and more money experts explain how to determine the amount you should really be saving for retirement.
The retirement rule—and when to bend it
The rule of thumb says you'll need about 80 percent of your pre-retirement income when you retire, says Hasnain Khokhawala of FinanceShed. So if your pre-requirement income was $50,000, you'd need $40,000 annually when you retire to maintain your lifestyle. Financial advisors suggest you save about 15 percent of your salary as early as possible if you plan on retiring at the age of 65. That way, you'd be about to replace 80 percent of your pre-retirement income with your pension and asset contributions combined, Nelson says.
John Davis, the founder of ScoreSense, likes to look at retirement in reverse to determine how much you'll need: "Plan to allow yourself to withdraw 4 percent of your total savings each year," he says. "Therefore, if you have $1 million saved for retirement, you would be able to withdraw up to $40,000 per year and feel safe that you will not run out of money in your twilight years." Are you able to live comfortably on $40,000 annually? If so, you're set, he says.
But don't get too self-assured: Julian Morris of Concierge Wealth management notes that healthcare costs for a couple who both retire at 65 are estimated to be $300,000 total throughout their remaining years—and that doesn't even include the costs of long-term care.
The biggest factor when it comes to deciding on the amount of money you'll need for retirement is the type of lifestyle you plan to have when you retire, Davis says. If you downsize, move to the suburbs, and cut down on entertainment, you can reduce the amount of money you'll need to retire comfortably. If you want to travel, see shows, and spend very little time at home, you should bump up your retirement savings. It's also important to factor in additional health and travel insurance costs that typically increase during your later years, Davis says.
You also need to understand social security in order to figure out how much money to save, says Curt Arnold, a certified public financial advisor. Unless you're concerned about a shorter lifespan, Arnold recommends that higher earners delay starting benefits until they're 70 to maximize those benefits.
"This will help make up more of the income gap, but also help the surviving spouse when one spouse passes and they have to go down to a single social security benefit," Arnold says.
When you're deciding how much you need to save for retirement, you need to consider a few additional things:
Do you have any outstanding debts or remaining mortgage payments? If so, you need more pre-retirement income than the usual 80 percent to cover those debts, Nelson says.
What type of life do you want to be able to afford in retirement—financially and energy-wise?
Will you have additional income streams when you retire? "This may come from property, side hustles or businesses you own," Nelson explains. If you have additional income streams, you may not need to save as much before you retire.
The percentage of bonds in your portfolio should equal your age. Most experts agree that as you get older, you should put more of your money into lower-risk investments like bonds, which are less likely to lose a lot of money if the market crashes, says mortgage broker Jennifer Harder.
In general, if you're young, investing in stocks can help you cope with more risk and possibly earn better returns. A conservative rule of thumb would be to pop 60 percent of your portfolio into bonds when you're 60—but having 30 percent of your portfolio in bonds when you're 30 may be too much.
"It all comes down to your risk tolerance, which is determined by factors other than your chronological age," Harder says. "Your risk tolerance is also influenced by factors such as your current employment, personality, and family status."