Creating a Retirement Savings Goal
Updated: Aug 18
What is your retirement savings goal? Have you established a dollar target that you have confidence in?
It can be tough to do when there are so many mixed messages and competing demands for cash. If you’re looking for a straightforward answer, or simple way to set the bar, you may be coming up empty - and that’s actually a good thing.
Retirement savings goals should be unique for you and your household and a general “rule of thumb” for retirement savings won’t necessarily get you where you need to be.
Develop a Retirement Savings Goal That’s Unique to You
It’s impossible to use a generic savings goal because your expenses are going to be different than everyone else’s. You need to get a good read on your fixed expenses like electricity, food, health and medical needs during retirement, living situation, lifestyle decisions, and more.
Instead of trying to reach an arbitrary savings goal - like $1 million or $2 million - by the time you retire, take the time to develop a goal that’s tailored to your specific situation throughout your retirement.
No one can predict the future, so we need to start with today’s best idea of the retirement picture that you envision and that will take care of your “needs” while also reaching your strong “wants” and even a few “wishes”.
When you tailor a retirement savings goal that fits your specific needs, you’re able to:
Account for hobbies you want to pursue in retirement such as travel
Prepare for any family-related or hereditary medical problems that could result in hefty expenses
Prioritize your spending in a way that lines up with your values
Decide how you want to leave a legacy through charitable giving, or providing for your family - and incorporate that into your retirement savings goal
Are you ready to get started developing your unique retirement savings goal?
Let’s dive in.
Start By Listing Your Expenses
According to a recent NerdWallet study, retirees spend an average of $3,507 after-tax each month on living expenses. This figure can be divided up into several expense categories:
When listing your retirement expenses, be as comprehensive as possible.
These percentages are a good baseline to help get you started on brainstorming expense categories and knowing roughly what to expect. But, you’re bound to have some that are completely unique to you.
For example, some clients we serve anticipate spending $35-40,000 on a new car every 7-8 years in retirement, while others may only spend $25,000 every 10 years.
While not reflective of the “average” family, we often find that our clients want to travel more in retirement. The cost of travel can increase annual retirement expenses by $10,000 to $15,000 per year! A sound retirement plan should incorporate these quality of life goals as well.
Your location can also be a major factor when it comes to ‘cost of living’.
For example, individuals living in Richmond, Va can expect to pay nearly 41% less in living expenses than those in Washington DC. Some folks choose to relocate in retirement to be near kids or take advantage of lower state taxes.
It’s also wise to leave yourself a little bit of wiggle room when gauging your expenses.
Don’t “round down” when trying to figure out how much you might spend in one category or another. Be as realistic as possible, then you can budget for the unexpected on top of your realistic expense projections.
There’s no reason to hold yourself to an impossible standard of sticking to your current projections down to the penny. Sometimes, life happens. That could mean you’re blindsided by a hefty medical expense after you retire. Or maybe you find a new hobby you’re really passionate about as a retiree.
Bottom line, you need to give yourself some space to live your best retirement, no matter what that looks like as the years go on.
Reaching Your “Number”
Once you know what expenses you anticipate, and have allowed some flexibility for life’s uncertainties, you can work backward to reach your retirement savings goal. This part of the process is relatively straightforward.
Calculate the total annual expenses you’ve estimated. Then, reduce this number by guaranteed sources of annual income like pensions and social security. Now, multiply the balance by 25.
Again, it’s wise to give yourself some wiggle room here. You want to plan with longevity in mind, meaning you want to plan for a long, healthy, and happy life when it comes to your retirement savings.
Retirement Savings Goal Example:
Joe and Susan estimate their annual after-tax fixed living expenses to be $55,000 per year. They plan on spending an additional $15,000 per year on travel and $12,000 per year on healthcare related expenses. Their combined spending comes to $82,000 per year in after tax dollars.
Additionally, they will receive $35,000 per year in guaranteed income from social security.
This means they have an additional income need per year of $82,000-$35,000 = $46,000.
To determine their retirement savings goal, multiply $46,000 x 25 = $1,150,000. This is a rough estimate of how much Joe and Susan will need in retirement savings.
Does that number look daunting?
Don’t worry. Chances are, it’s not as bad as you may think. This is the number you’re aiming to save (in addition to what you already have put away), but in most cases, it doesn’t all need to come directly from you.
Some part of your retirement savings will grow over time, as your funds continue to grow in their diversified investment accounts.
If you’re working on coming up with your unique retirement savings goal, it can help to speak with a financial advisor about where you currently stand, and what you need to do to put yourself on the path toward success. Getting expert guidance to create a personalized retirement cash flow analysis can help.
At Covenant Wealth Advisors, we work with clients who are nearing retirement, or currently going through the retiring process, to develop a comprehensive financial plan that addresses everything from their expenses during retirement to the mitigation of taxes on their retirement income.
Mark Fonville, CFP®
Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors.
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