More women are working and taking charge of their own retirement planning than ever before. What does retirement mean to you? Do you dream of traveling? Pursuing a hobby? Volunteering your time, or starting a new career or business? Simply enjoying more time with your grandchildren? Whatever your goal, you’ll need a retirement income plan that’s designed to support the retirement lifestyle that you envision, and minimize the risk that you’ll outlive your savings.
Establishing a target age is important, because when you retire will significantly affect how much you need to save. For example, if you retire early at age 55 as opposed to waiting until age 67, you’ll shorten the time you have to accumulate funds by 12 years, and you’ll increase the number of years that you’ll be living off of your retirement savings. Also consider:
We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. The problem is particularly acute for women, who generally live longer than men. To guard against the risk of outliving your savings, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or life expectancy calculators to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.
Once you know when your retirement will likely start, how long it may last, and the type of retirement lifestyle you want, it’s time to estimate the amount of money you’ll need to make it all happen. One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to save by the time you retire. It’s often repeated that you’ll need 70% to 80% of your pre-retirement income after you retire. However, the problem with this approach is that it doesn’t account for your specific situation.
Focus on your actual expenses today and think about whether they’ll stay the same, increase, decrease, or even disappear by the time you retire. While some expenses may disappear, like a mortgage or costs for commuting to and from work, other expenses, such as health care and insurance, may increase as you age. If travel or hobby activities are going to be part of your retirement, be sure to factor in these costs as well. And don’t forget to take into account the potential impact of inflation and taxes.
Once you have an idea of your retirement income needs, your next step is to assess how prepared you (or you and your spouse) are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your earnings will be another source of income.
When you compare your projected expenses to your anticipated sources of retirement income, you may find that you won’t have enough income to meet your needs and goals. Closing this difference, or “gap,” is an important part of your retirement income plan. In general, if you face a shortfall, you’ll have five options: save more now, delay retirement or work during retirement, try to increase the earnings on your retirement assets, find new sources of retirement income, or plan to spend less during retirement.
Even after that special day comes, you’ll still have work to do. You’ll need to carefully manage your assets so that your retirement savings will last as long as you need them to.
Unfortunately, there’s no one-size-fits-all when it comes to retirement income planning. A financial professional can review your circumstances, help you sort through your options, and help develop a plan that’s right for you.