If you are a 50+ woman in your peak earning years, reading the headlines about the challenges of retirement planning can appear rather overwhelming and even scary. Many retirement planning books will recommend saving a nest egg minimum of $1 million in order to retire comfortably. That’s a lot of money to save!
If you look at more detailed statistics it will tell you that you need to have 70% to 80% of your family income today to cover your expenses in retirement. This means that if your family income is $100,000 today, you will need to have from $70,000 to $80,000 per year to maintain the same lifestyle after you stop working. Now you need to multiply that by the number of years you expect to live in retirement. Thus, if you expect to live in retirement for 25 years.
$70,000 x 25 years = $1.75 million
$80,000 x 25 years = $2.0 million
Those are some scary numbers! What if I don’t have this kind of money saved for retirement? What if I don’t want to continue working until I reach the minimum of $1 million, which sounds like forever? What happens then?
To answer these questions, we need to take a close look at our income, savings and expenses. Can I reduce my expenses and increase my savings, so that I can get by on much less in retirement?
How much will it really cost to live once I retire?
Most of us think that planning for retirement is all about saving and investing. But how much we spend is a far more important issue. If I start spending more than my retirement income, I will not stay retired for too long.
However, it is very difficult to predict how much it will cost to live once you retire. If you are like me and planning to retire in 10+ years, how can you know how much you will be spending at that time? And if you are already retired, you might be looking at 20 to 25 years of retirement spending. It’s even more difficult to estimate the costs of living so far in advance.
So how do you start? In 4 simple steps.
Step 1: Cost of living now – Your current spending
Do you know how much you spend in a month? In a year?
Do you know how much you have to pay for mortgage or rent, utilities, insurance, education, and health care?
Do you know how much you have to pay for food, clothes, and activities?
If you are a 50+ woman approaching retirement, you need to analyze how you spend your income today. The best way to do this is to create a spending plan and look at your current spending habits.
Why you NEED to create a spending plan?
- It will help you avoid spending more than you earn.
- It will help you free up extra money to pay down debt or pay off a mortgage.
- It will help you find extra savings that you can use to increase your contributions to retirement accounts: 401(k), IRA, Roth IRA.
- It will help you see how much income you really need to enjoy your lifestyle in retirement.
How to create a spending plan?
Start by tracking your current spending. Keep track of everything you spend money on. You need to look at your day-to-day spending as well as at your regular expenses.
Use a piece of paper and create a worksheet with all your spending categories.
Dividing every expense into categories (or buckets) will allow you to see the big picture. At the end of the month, look at your categories and see how much you spend on each:
- Housing (mortgage/rent, maintenance, property tax, property insurance, home improvement)
- Utilities (gas, water, electricity)
- Vehicle (insurance, maintenance, fuel, car loan)
- Food (groceries, dining out)
- Healthcare (out of pocket expenses, dental, eye exams and glasses)
- Insurance (health, life, liability)
- Personal (clothes, education, personal debt, gym membership)
- Entertainment (travel, cable, internet, books, memberships)
It may sound like a time-consuming project, but believe me, it’s not! You don’t need to use a paper or Excel spreadsheet to write down your monthly expenses. There are many websites, programs or apps like Mint.com or Quicken.com that will automatically collect and categorize every credit card transaction.
I still use a combination of paper and Excel spreadsheet to keep a track of our family expenses. This gives me a good sense of where our money is going every month. However, recently I started to use Personal Capital. It’s automated and you can keep a track of every penny spent. And it’s free! Personal Capital
At the end of the year I combine all 12-months of expenses and divide it by 12, so I will know our 12-month average spending. Then I will do the same calculation with our monthly income and come up with our 12-month average income number.
The reason I like to use 12-month average is because in some months we spend more than in others. Some insurance payments, property taxes need to be paid quarterly. Then we might have out of pocket medical expenses, holiday gifts and donations. So, the monthly costs might fluctuate. But if I look at the 12-month average, I get a good idea of how we spend on average.
I like to do all these calculations. It helps me to see how much we need to live on month to month. It also helps to project our future expenses when we stop working.
Step 2: Cost of Living in Retirement – Future Spending
The next step is to predict your future spending
What will be your future cost of living? There are several ways to predict based on expert’s advice:
- 70% to 80% of what you spend while working
- The same of what you spend while working
- Spend much less in retirement then you spend while working
- Spend more when you just retired, then spend less as you grow older
When you just start calculating your future expenses you can use ballpark numbers. Then with more months of tracking your spending, you will get a better picture of where your money is going.
The following questions will help to predict the future expenses more accurately:
- Will your mortgage to be paid off?
- Will your debts be paid off?
- Will you relocate to a different state?
- Will you support your kids or grandkids?
- Will you support any family members?
- Will you travel more?
- Are you in a good health? How much will you spend on health care?
As we get older there will be other expenses we are not dealing with today. Health care cost is one of the biggest retirement planning concerns. According to statistics, you will spend at least 25% more on health care when you retire than you are spending today.
Step 3: Inflation Adjustment
What is inflation?
Inflation is when the price of goods or services goes up over time without the goods and services being improved. Inflation is caused by many economic factors. But generally speaking prices go up over time. The rising prices will erode your future spending and decrease the value of your money. When you are working, your wages go up as the costs of goods and services grow higher with every year. However, when you stop working and start living off your savings, inflation will rob you of your income.
Here is a simple example to help you understand the effect of a 3% inflation rate on your retirement income:
- If your cost of living is $35,000 a year now, in 10 years you will need to have $47,000 a year to support the same standard of living.
- If your cost of living is $35,000 a year now, in 20 years you will need to have $63,000 a year to support the same standard of living.
It is hard to predict what inflation is going to be in 15 or 20 years. There is tons of information on the rate of inflation. Most experts recommend the base assumption of a 3% inflation rate.
My advice is to use online calculators to see how much your savings will be worth 10, 20, 25 years from now. There are many online calculators out there, but here’s one by AARP Retirement Calculator that gives you a lot of good options to play with.
Step 4: Review and Update Once a Year
After calculating your current and future spending, you need to review and update your calculations regularly. It is an important part of getting ready for retirement.
Running a basic retirement calculation once a year will give you a snapshot if you are on a track to meet your future goals. The numbers you used a year ago may have changed. Everything from your income to expenses will change within years. If things change, don’t forget to adjust the future spending plan. Over time you will get better at tracking your actual spending.
At the start you had to guess how much you will need in retirement. But after a few years it will became much easier and you will have a real picture of your family finances. The more real financial history you have, the more accurate your future projections can be.
I know there are many reasons why people don’t want to take time to run the basic retirement calculations. I think the most common reasons:
- Fear of finding out that they aren’t on track
- Not enough knowledge how to start a plan and then track their progress
- Lack of confidence they are saving enough
The important part is to overcome the fears. You as a woman need to start making small steps to understand the basics of retirement planning. You need to calculate the current cost of living and create the spending plan for your future. It might take time and hard work to get there. But once you start working on it, you will feel much happier about your progress. Knowing that you have enough money to live the life you dream about in retirement is incredibly satisfying. While money certainly can’t bring us happiness, stress and worry about the unknown cost of living in retirement will push us into an unhappy state.
Did you calculate your cost of living in retirement? Did you start working on your retirement plan? Please share your thoughts and progress.