While you might find yourself thinking about a retirement filled with new hobbies, traveling, or simply plenty of relaxation, there’s one thing that’ll cut through any daydreaming. In a word: money.

When it comes to saving for retirement, how much is enough?

There are a number of frequently suggested retirement savings targets, including:

  • 80-70% of pre-tax income (80% being one of the most frequent figures)
  • $1-1.5 million
  • 8 times your final pay at age 70
  • 10 times your final pay at age 67
  • 12 times your final pay at age 65
  • 10 to 12 times your current income

While these targets may serve as helpful guidelines, they’re not a guarantee you will have saved enough for retirement — even if you follow one to the very cent. Considering financial needs differ from person to person and evolve over time, it’s clear that there is no magic number or one-size-fits-all strategy when it comes to retirement savings. Instead, you should set reasonable estimates of what you’ll need for a comfortable retirement.

Projected future spending can be based on three key factors:

  1. Expected lifestyle
  2. Health and longevity
  3. Unexpected retirement

Expected lifestyle in retirement

Your current lifestyle will gradually transform as you approach retirement, leading to a change in spending habits and expenses. As a result, creating a projected budget can help identify expected outflows.

These primary spending categories are:

  • Housing costs
  • Healthcare
  • Transportation
  • Taxes and insurance
  • Food
  • Clothing and personal items
  • Travel and entertainment
  • Contributions to children and grandchildren

You may already have an idea of the impact your desired lifestyle will have on future spending. For instance, some people plan on traveling more in retirement or taking up hobbies that will increase travel or entertainment spending. They might also expect to be mortgage-free in retirement, cutting housing costs significantly.

Considering the level of uncertainty on how much is actually needed for retirement, a projected budget can also identify areas of spending that can be reduced. For instance, a couple with financially independent children and who live in an expensive area may consider downsizing and moving to an area with a lower cost of living. Similarly, individuals can plan on taking a number of smaller actions (eg. more cooking at home, better shopping habits) to increase savings.

Health and longevity in retirement

Health and longevity are often overlooked when it comes to retirement savings. It’s important to make an honest assessment of current habits and family health history to determine the long-term impact and potential costs. For instance, you might need to take into account caring for a loved one with a chronic health condition.  Certain lifestyle choices such as smoking and drinking may also suggest future medical expenses. While the former can be an inevitable cost, one can reduce the likelihood of the latter by being more active or maintaining a healthier lifestyle.

Assuming no significant health issues arise, a look at longevity can help develop a timeline throughout retirement. The average life expectancy has increased over the years and you may need to consider the cost of long-term care, especially if assistance from family or friends is not an option. Costs would then include nursing home care and/or in-home care expenses.

Unexpected retirement

Despite best efforts, you may retire earlier than planned for reasons beyond your control. Corporate restructuring may result in unemployment, and finding new work can be more difficult at an older age. Alternatively, you may need to take care of a loved one on a full-time basis or face an illness that leaves you unable to work.

When it comes to savings, you should factor in a scenario where you may need to use your retirement funds earlier than expected.

Conclusion

A reasonable estimate of financial needs you might face in retirement can help you decide whether your current sources of income (and savings rate) will be sufficient.

If you think your income isn’t enough, reduce your current spending habits and seek guidance from an investment professional to help you stay on the right track. You will have a better idea of what your needs will be the closer you are to retirement. It’s important, however, to start saving and planning as soon as possible.

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