A beachfront in the tropics, a villa in the mountains, or a nice place near your home town all make great places to dream about for retirement. For most people, the question is not about where to retire, but about how to have enough money to live. When trying to determine how much you will need for retirement, you have to start by asking a few important questions and build from there.
What type of lifestyle do you want to maintain after you retire?
If you are one of those rare people who have always lived a simple lifestyle, you may find that you will need very little to live on in retirement. Unfortunately, most people only live a simple lifestyle out of necessity rather than choice.
What will you want to have and do when you retire?
Make a list of things and activities that are important for you to have the lifestyle that you want in retirement. You may need to refine this list if your wants outnumber your needs too much. Use this list to arrive at an annual or monthly income amount that is needed to make it happen.
Your retirement will probably last between 15 and 30 years.
You will need an income source that will not be exhausted before your life ends. Otherwise, you will find a dramatic drop in your standard of living at some point before you die. Actually, it is better if you have numerous sources of income so that if one dries up, you do not have a financial catastrophe.
You have choices about how you fund this adventure.
Your first line of income is Social Security combined with other retirement plans that have guaranteed income until your death. If you are lucky, you have worked for an institution, agency or company with great retirement benefits. These are becoming rarer each year. If the combination of these two sources is enough, you may already have your retirement adequately funded.
Think of your retirement money in two buckets.
The first bucket is your guaranteed income from permanent sources. The second bucket is your savings and investments. You generally will have only very limited control over the first bucket. You have almost total control over the second bucket. Whether you have a nest egg in retirement depends on how hard you try to build it. Even small amounts of money tucked away regularly over a long period of time can become great. The problem is that very few people have the discipline to do this.
In retirement, you should be able to reduce your living expenses.
Many people are able to pay off their house before they retire. This takes a big item out of the budget. Because you are not going to work everyday, your transportation expenses will be lower. Depending on the type of work that you have done, you may find that your clothing and dry cleaning bills will go down.
By working to eliminate all debt before retiring, you will assure that your monthly expenses are as low as possible. In your early retirement years, having the extra time to do your repairs will save you several dollars each month.
As you age, certain expenses will increase.
Medical expenses are a big cost to seniors. Medicine bills can begin to look like house payments. Should you need nursing home care, you will find this to be a really scary number. It is important that you accumulate enough savings and investments to give you extra income offset some of these costs.
Good health at retirement does not guarantee low health care costs.
Even with relatively good health, you can reach a place in retirement where you may have five or more years of burning through large sums of money. To compensate for this eventuality, you will need enough income to continue to build your savings and investments during the early retirement years.
An example of potential retirement money needs.
Obviously, where and how you live can make significant increases in these numbers. This example is based on a Midwest location with a middle class lifestyle. Utilities will cost about $250 per month. You can expect to need about $350 to eat. Add on extra if you eat out a lot. Clothing, hair care, minor medical needs will add another $150. If your house is paid for, upkeep will still cost you another $100 or so per month.
Add in some money for travel, taxes, insurance, gifts, and other normal spending.
These amounts will pile on at least an additional $500. This totals to $1,350 each month. You still have to add on medical and other personal financial outlays. Your retirement income will need to be $2,000 or more per month to live without having the stress of continual financial shortages.
Make appropriate adjustments for your cost of living in your location.
This will give you a good idea of how much money you will need in retirement. You might have other personal or family needs that will push these amounts higher. If you life in a high cost of living area, you may find that by selling your home and moving to a less costly area, it will enhance your retirement lifestyle. The good news may be that if you are married or have a partner that you may get additional income from his or her side without significantly increasing expenses.