Approaching retirement can be a daunting prospect, especially if you are unsure if you have saved enough money. A recent survey suggests that the average American should have saved $1.46 million for a comfortable retirement, but most pre-retirees fall short of this number. However, focusing solely on a magic savings number may not be the best way to determine if you can afford to retire. Instead, consider using the common-sense formula for retirement security: I > E, or having income greater than your living expenses.
To put this formula into practice, start by listing all your regular living expenses that you expect to have in retirement. Consider how your expenses may change once you retire, such as increased medical costs and decreased work-related expenses. Identify your must-have expenses, like housing, utilities, and insurance, as well as your nice-to-have expenses, such as travel and hobbies. Once you have estimated your annual expenses, you will have a target for the total amount of retirement income needed.
Next, add up all potential sources of retirement income, including Social Security, pensions, annuities, and systematic withdrawals from retirement savings. Consider working income during retirement, but be cautious as this may not be a reliable long-term source. Factor in inflation by ensuring that some sources of retirement income increase annually to counter rising costs. If you find that you do not have enough retirement income to cover your living expenses, you may need to reconsider your retirement age or find ways to reduce expenses.
If you are struggling to determine your retirement income needs, seeking the guidance of a professional advisor may be helpful. Understanding the basic steps of retirement planning can enable more productive conversations with an advisor. While relying on a magic savings number may seem convenient, taking the time to thoroughly analyze your retirement income needs is a more effective way to ensure financial sustainability in retirement. By carefully balancing your income and expenses, you can retire comfortably without necessarily needing $1.46 million in savings.
