One of the most important questions to consider when preparing for retirement is also one of the hardest to answer:
How much income will I actually need?
There is no single number that works for everyone. Your retirement income needs will depend on your lifestyle, expenses, sources of income, health care costs, and how long your retirement lasts.
The goal isn't simply to accumulate a certain amount of money. It's to determine how your savings and other resources can work together to provide the income you'll need throughout retirement.
Before estimating how much income you'll need, think about what you want retirement to look like.
Will you travel? Spend more time with family? Relocate? Stay in your current home? Pursue hobbies or other activities?
Some expenses may decrease when you retire, while others may increase. Understanding the lifestyle you envision can help you develop a more realistic picture of your future income needs.
Begin with the expenses you'll likely continue to have regardless of how you spend your retirement.
These may include:
Then consider discretionary expenses such as travel, entertainment, hobbies, gifts, and other activities.
Separating essential expenses from discretionary spending can help you understand how much reliable monthly income you may want available.
Next, take inventory of the income you expect to receive in retirement.
Depending on your situation, that could include Social Security, pensions, retirement accounts, personal savings, investments, or annuity income.
The important question is whether those income sources are expected to cover your anticipated expenses.
If there is a difference between the income you expect to receive and the income you believe you'll need, that's your retirement income gap.
Identifying that gap early gives you more time to consider strategies for addressing it.
Retirement can last much longer than many people expect.
That makes longevity an important part of retirement income planning. Your strategy needs to consider not only how much income you'll need when you first retire, but also how your income needs may change over many years.
Inflation, health care expenses, market conditions, and unexpected costs can all affect how far your retirement savings will go.
For many retirees, part of the planning process involves determining how much of their essential expenses they would like covered by predictable sources of income.
Social Security and pensions may provide part of that foundation. For some individuals, annuities may also be considered as part of a retirement income strategy because certain types of annuities can provide guaranteed income, subject to the claims-paying ability of the issuing insurance company.
The appropriate strategy depends on your individual circumstances, goals, and financial situation.
Retirement planning isn't only about asking, “How much have I saved?”
It's also about asking:
How much income will I need, where will that income come from, and how long will it need to last?
Understanding those three things can provide a much clearer picture of your retirement readiness.
Take the CDA Retirement Checkup for a quick look at your current retirement picture, or schedule a consultation with CDA of America to discuss your retirement income goals.
CDA of America provides insurance and retirement education. Information presented is for general educational purposes and should not be considered individualized financial, investment, tax, or legal advice.