Saving Enough for Retirement

Few Americans know how much money they’ll need to save for retirement. Some 44 percent of employed Americans–and even 29 percent of those ages 55 and older–admit they don’t know how much money they will need in retirement, according to a recent ING Direct survey. Among those who have a retirement savings goal, a third of current workers 55 and older believe they need $250,000 or less in order to retire. Another third of older workers think they need to save $1 million or more. Here is how to tell if you are saving enough.

Monitor current expenses. Unless you’re intending to enter retirement newly mortgage free or to downsize significantly, estimate that your expenses will remain largely the same in retirement. If you plan to travel or take up expensive hobbies, your cost of living may even increase. “Most people don’t change how much they spend when they retire,” says Constance Stone, a certified financial planner and president of Stepping Stone Financial in Chagrin Falls, Ohio. “Work off the scenario that you are going to spend about the same as you do now in retirement.”

Consistency matters. Beginning to save for retirement as soon as you begin working full time is generally the best way to accumulate a large retirement account balance. “You should be saving a minimum of 10 percent of your gross income in 401(k)’s or taxable accounts,” says Scott Leonard, a certified financial planner and chief investment officer for Trovena in Redondo Beach, Calif. If you’re saving less, step up your retirement savings each time you get a pay boost. “Every time you get a raise, take 20 percent of the value of that raise and put that into savings,” Leonard says.

Factor in Social Security benefits. Most Americans don’t have to finance retirement completely on their own. Some employees still have traditional pensions that guarantee income for life. Retired workers also received Social Security checks worth an average of $1,164.30 each month in 2009. Although you are not likely to be able to sustain your desired lifestyle using Social Security payments alone, you’ll have a nice base to build your savings upon. Workers can boost their Social Security checks by 7 to 8 percent for each year they delay signing up for benefits between ages 62 and 70. You can get an estimate of your future Social Security benefits at ssa.gov. Factor that amount into your savings calculations.

Budget for taxes. Your entire 401(k) balance isn’t available for spending in retirement. Regular income tax is due on withdrawals from traditional 401(k)’s and IRAs. If you withdraw $20,000 from a retirement account and are in the 25 percent tax bracket, $5,000 will be due to Uncle Sam. No income tax is due on Roth 401(k) and Roth IRA distributions in retirement because you already paid tax on that money before it was deposited.

Consider health expenses. Healthcare expenses can make a huge dent in your retirement savings. Even after retirees qualify for Medicare coverage at age 65, they must still pay for premiums, deductibles, copays, and common uncovered items such as eyeglasses and dental care. Out-of-pocket medical expenses throughout retirement for a 65-year-old couple retiring in 2009 could be between $240,000 (Fidelity Investments estimate) and $338,000 (Employee Benefit Research Institute calculation). The Urban Institute recently projected that median out-of-pocket healthcare costs for retirees will reach $6,200 annually in 2040. None of these estimates include the cost of long-term care, such as assisted living or nursing home care, which could easily be the biggest retirement expense of all. “Just about half of my clients have had knee replacement and then have to get care in the home,” says Susan Spraker, a certified financial planner and president of Spraker Wealth Management in Maitland, Fla. “People are not planning for what are they going to do when they can’t live on their own anymore.”

Picture your desired lifestyle. A retirement spent traveling the globe or with an ocean view is obviously going to cost more than downsizing into a smaller house or condo. Those who choose a low-cost place to retire may be able to get by with significantly less money. “Someone who lives in a community in rural South Carolina is going to need a different amount of money than someone who lives in New York City,” says Spraker. “It completely depends on the person’s lifestyle and how early they retire.” Retirees willing to work part time in retirement can also get by with less in savings, and those willing to delay retirement can shorten the number of retirement years they need to finance.

Estimate life expectancy. The wild card in retirement planning is how long you will live. Your nest egg must be divvied up to provide a stream of income that will last as long as you do. Spraker says retirement savers should plan on living into their 90s, while Stone recommends budgeting for age 100. Couples should also factor in the woman’s typically longer life expectancy.

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