Do you know how much you need to save to ensure that you won’t run out of money during your lifetime?
Consumer Reports Money Adviser notes that financial companies’ TV ads often tout “your number” – the amount you’ll need for retirement, which is generally a seven-digit sum.
Others use different but equally daunting benchmarks, such as a yearly income-replacement rate of 70 to 85 percent of your last working year’s salary.
Your actual needs will depend on an array of variables, some of which you might be able to control – such as your lifestyle, how much debt you carry and your retirement age – and some that you can’t, like your health, your investment returns and your life span.
Consumer Reports Money Adviser suggests following these guidelines to help you plan for a successful retirement:
• Save more and spend less. Keeping your expenses in line accomplishes two things: You’ll be able to save more for retirement, and you’ll be able to live on less once you stop working. If you’re looking to ratchet up your savings rate, try to cut back on your discretionary spending.
• Set up multiple types of accounts. First up is fully funding your 401(k), at least to the level you need to get your full employer match. Aim for a target of about 15 percent of your salary between your contributions and your employer’s. Then fund an IRA (Roth or traditional) and taxable accounts to hold investments you might not have access to in a 401(k), such as energy, commodities or real estate investment trusts.
• Maximize Social Security benefits. Every year that you delay collecting Social Security between the ages of 62 and 70 adds 8 percent to your eventual monthly payout – a guaranteed return you won’t get anywhere else.
If you’re close to retirement, you can probably assume you’ll get the full amount promised to you, but if you’re decades away, financial planners often recommend calculating your potential benefits with a 25 percent discount to account for any possible changes in the program.
Waiting as long as possible to collect Social Security might be the best strategy if you’re single or widowed, but married couples might want to consult a financial planner to learn how they can maximize their benefits.
• Reduce debt before you retire. Ideally you’ll be debt-free as you enter retirement. Of course, paying off high-rate credit card debt is a no-brainer.
But what about your mortgage? Pay it off and you can improve your cash flow in retirement, and perhaps gain some peace of mind. But if you can refinance with today’s rates as low as 2.75 percent for 15-year mortgages and 3.375 percent for 30-year ones, according to HSH.com data, an argument can be made for holding a mortgage into retirement.
• Consider health care costs. If you retire before age 65 and your employer doesn’t offer retiree health insurance, you’ll probably get sticker shock when you see the full cost of your health insurance. Once you reach age 65, you’ll be eligible for Medicare, though you’ll have to pay premiums for Part B coverage and for a Part D drug plan.
• Asset allocation still matters. If all goes well, you might be retired for 20 or 30 years. So you should continue to divide your investments among stocks for growth and inflation protection and bonds for income, even after you retire. One common rule of thumb, popularized by Vanguard’s founder, John Bogle, is that your bond allocation should equal your age.
• Plan your transition. In Consumer Reports Money Adviser’s 2011 survey, 14 percent of retired respondents said they regretted not developing friendships that would have lasted beyond their working years, and 9 percent said they wished they had hobbies or interests that would have kept them engaged in retirement. So before you call it quits, make sure you’re ready for a very different lifestyle.