Are you one of the 64 percent of Americans concerned about not having enough money in retirement? According to Gallup’s 2016 survey of Americans’ financial concerns, retirement topped the list, edging out worries about medical bills and sustaining one’s lifestyle. In fact, retirement has been the top concern every year Gallup has conducted the survey.1
One of the best ways to alleviate that concern is to develop a detailed retirement plan. By planning ahead, you can establish a retirement savings goal and then work backward to create and implement a savings strategy.
Perhaps you’ve already calculated your retirement savings goal. That’s a helpful first step toward funding your ideal retirement. But what if your savings goal isn’t accurate? If you’ve calculated a goal that isn’t correct, it could cause you to save too little, leading to a funding shortage when you decide to stop working.
Believe it or not, many people are saving money for retirement with an incorrect goal as their target. That’s the equivalent of heading out on a road trip with the wrong destination marked in your GPS. It doesn’t take long before you’re substantially off track.
Below are three reasons why your retirement savings goal may be incorrect. Do any of these reasons sound like a possibility for your savings target? If so, it may be time to reassess your plan.
Your spending estimate is too low.
Your savings goal should be high enough that it can generate sufficient income to fund your lifestyle in conjunction with Social Security and other income sources. One way to calculate this number is to estimate your spending and then back into the amount of assets needed to fund your expenses.
However, too many workers underestimate how much income they will need in retirement. Consider that when you retire, you may have more free time than you’ve ever had in your life. It’s easy to fill that time with travel, shopping, dining out or other costly activities. Review your planned spending and think about whether you’re underestimating your needs.
You used a simple formula to calculate your goal.
There are plenty of easy and fast “rules of thumb” out there to help people quickly calculate savings goals. They may include things like a multiple of your salary or some percentage of your pre-retirement spending.
The problem with these back-of-the-napkin calculations is that they don’t account for your unique needs and goals. You may have costly medical needs or substantial debt. You might have high-cost lifestyle goals, or you may financially support a child or other loved one.
Develop a detailed retirement budget based on your unique needs. Then use that data to develop your savings target.
You didn’t account for health care costs.
Many workers assume that Medicare covers all health care costs in retirement. Unfortunately, that assumption is usually wrong. In fact, Medicare covers only a portion of most expenses, with the rest paid out of pocket. And there’s often no cap on the amount of out-of-pocket costs. In fact, Fidelity estimates the average 65-year-old couple will spend $260,000 of their own money on health care in retirement.2
Does your retirement budget include health care costs? If not, you may need to recalculate your savings target.
Unsure of whether your savings goal is accurate? Let’s talk about it. We can help you analyze your goals and calculate an accurate savings target. Let’s connect today and start the conversation.
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