You are also likely to be spending more money on clothing and business lunches than you will in retirement. Work-related costs: If you have a long commute, you’re likely spending money on gasoline and putting costly miles on your car. For retirement planning, the important question is whether those financial responsibilities to other generations will continue once you’re retired. Retirement advisors call this the “Sandwich/Oreo Effect” because these pre-retirees are feeling a financial squeeze at both ends. In addition to helping their kids, parents nearing retirement may still be caring for their own parents. Even among empty nest households, adult children haven’t fully fledged from their parents’ bank accounts – often getting financial help with car payments, insurance or cellphone service. Subsidizing other generations: According to the Pew Research Center, 15% of those age 25-35 were still living with their parents. Those with higher incomes are not immune to debt accumulation, such as for luxury home mortgages or high credit card balances. Housing cost: If you are paying on a mortgage, will your home be paid off by the time you retire? Are you downsizing to a smaller home that will cost less? Will your property taxes change?ĭebt management: While managing debt can be a healthy part of financial planning during your working years, as you get closer to your projected retirement age you should do your best to plan your way out of debt. When estimating your monthly costs, start by looking at where your money is going now and consider whether that spending category is likely to change when you reach the age that you plan to retire. Here are some of the more common factors: You’ll want to consider several important factors when estimating your monthly spending in retirement to determine whether you’re going to be on the lower, higher or right at the mid-point of that range. A study of actual retirement cost found that while spending in retirement ranges from 54-87%,that most retirees use 70% or less of their former income. While the 70-80% Rule is a good starting point, the actual percentage can vary considerably depending on individual circumstances. If that’s less than the monthly amount your retirement funds have been forecast to produce, that’s a good sign – but you may need to take it further than this. Retirement advisors at Fifth Third Securities generally agree that a good rule of thumb for estimating your future spending is to multiply your current monthly spending by 70-80%. To calculate whether your projected retirement income will be sufficient, don’t think about it in terms of your gross salary but instead the net income you actually have in hand to spend. Your contribution to Social Security and unemployment insurance is 6.2% – or 12.4% if you’re self-employed.The amount you are currently putting into your retirement fund can (and should) be anywhere from 5-15% of your gross income.While you are working, your gross pay has to cover two major expenditures that go away in retirement: Once you have that estimate, compare it to your current income.ĭon’t panic if that estimate does not seem very close to your current annual salary. Working backward from your best-case life expectancy (and accounting for inflation), your advisor can calculate how much monthly income you can expect from these resources after you retire. That essential math question is something a retirement advisor can estimate for you based on your projected income from Social Security, pensions, annuities, 401(k), IRA, etc. In retirement planning, the most important number is not the total amount of money you have saved, but how that grand total will translate into a sustained monthly income for the entirety of your retirement years.
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