75% of people surveyed by Fidelity underestimated the amount they needed for retirement.

Whether you are near retirement or decades away, retirement is an incredibly important goal to plan and save for.

Why?

Because everyone deserves to live with dignity in their old age.

So how much do you need?

Frankly, it depends on a number of factors specific to your unique situation.

No matter what retirement service you use, keep in mind that the amount you see for your retirement needs is only an estimate. That’s because it’s hard to predict certain factors beforehand.

So let me share with you key factors that can significantly influence the amount you need in retirement so you can accurately assess your retirement goals.

Time in Retirement

We are living longer, thanks to advances in medical technology.

The chart below from The World Bank shows how life expectancy has been increasing in the U.S. over the years.

US Life Expectancy at Birth

...which means we can expect to spend longer in retirement than earlier generations and thus will need more in retirement savings.

According to life expectancy calculators provided by the Social Security Administration, a man who reaches 65 today can expect to live, on average until age 84.3 and a woman until age 86.6.

That's almost 20 years in retirement!

Projected Expenses in Retirement

Here, once again, you have to consider what your likely expenses will be in retirement based on your life's choices.

Do you expect to have fully paid your house by retirement or are you estimating some form of rental or mortgage payment even while in retirement?

The state where you choose to retire could also influence your expenses in retirement.

Even if you don’t know this far out how life will shake out, it’s perhaps prudent to make educated guesses about the future and estimate your retirement needs.

You can periodically perform a retirement analysis as life happens and re-estimate your needs.

Social Security

If you plan to rely on social security benefits to supplement your retirement income, you may save less. Retirement calculators incorporate the effect of social security.

We, at YourCapital, offer a retirement analysis service where you can see your retirement estimate with or without social security. You can try our retirement service here.

You may take a conservative approach towards retirement savings: save enough so that social security income acts as supplemental income while your savings cover your primary expenses.

Inflation Expectations

Inflation can significantly jack up how much you need to save for retirement. Historically, inflation has stayed around 3% and is currently hovering at 2%.

It’s difficult to predict what inflation will be when you retire, but it's prudent to estimate retirement needs using the long run 3% inflation rate.

The chart shows how inflation has fared since 1913.

Historical Inflation Rates

You could estimate retirement needs with an inflation rate of 3% to begin with and then change inflation to 2% and see how the amount you need to retire changes.

Hypothetical Example

Say you are 34 years of age and will most likely retire at 67. Thus, you are 33 years from retirement...quite a long time.

Now let’s assume you will enjoy a 20 year time horizon in retirement. That means you would like your savings to cover your expenses for that time period.

The next step is your projected expenses in retirement. Let’s assume that your current expenses are $3,000 per month and that your expenses in retirement will be 30% less.

Why you ask?

Well...people in retirement generally don’t spend as much as they do when they are working. For e.g. people in retirement spend less on wardrobe and on eating out.

So let’s say in today’s dollars, your monthly expenses in retirement will be 70% (a reasonable estimate), i.e. $2,100.

We will assume a 3% inflation during retirement.

Again, please understand that we are trying to save for a future goal and the future is inherently uncertain. Therefore, we are trying to make educated assumptions to get an estimate.

Based on YourCapital’s retirement analysis, you will need $1,493,895 for retirement (excluding social security).

Retirement goals with 3% inflation

For this analysis, we do not assume any social security contributions which are based on your salary and how long you have been working.

You can provide brief employment information to see what our service estimates for your social security benefits, if you are interested.

Now what if we change inflation rate to 2%?

Assuming all other factors remain unchanged, you will then need:$1,080,883.

Retirement needs with 2% inflation

Again, for this analysis we do not assume any social security contributions which are based on your salary and how long you have been working.

So you need to save 27.65% less if inflation remains tame at 2%.

That’s because as inflation increases, it reduces your purchasing power ... which is another way of saying you can buy fewer items (fewer eggs, fewer apples etc) for the same amount of money.

With our retirement service, you can change all these life's variables and perform a what-if analysis to see, for example, how retiring later could alter the amount you need for retirement.

Key Takeaway

It’s hard to plan so far head for a future goal but you can certainly make educated assumptions about the future and start saving for your retirement now.

Since the retirement amount you need is a moving target, I would recommend that you continue to evaluate your retirement needs on an ongoing basis to ensure you are on track.

Not to blow our own horn, but if you try our retirement analysis, we automatically send you an email with a monthly retirement analysis.

Perhaps monthly might be too frequent for you and you are comfortable with an annual retirement analysis to ensure you are on track.

Either way, please save for retirement.

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