1. What do you want to do during retirement?
During your thirties and forties, it may be hard to envision how you’ll spend your years of financial freedom. When you reach the 10 to 15-year mark before retirement, the sense of urgency is likely to increase. Take the time to think about these retirement questions to define the “why” behind your goals. Understanding the importance of retirement begins with asking yourself what you most look forward to doing.
Use these additional questions to help guide you:
– How do you currently spend your free time?
– How often do you plan to travel to see friends or family?
– Will regular vacations be part of your plan?
– Do you want to work part-time, volunteer, or start a business?
– Where will you decide to live?
If retirement seems a distant dream or you have no idea when you’ll exit the workforce, just focus on the things you currently enjoy spending your time on. Your personal definition of retirement may simply be an opportunity to dedicate more of your time and resources to the things you enjoy doing today.
2. How long do you need your money to last?
This question pertains to how long you plan to live. Many may not like to think about life expectancy, but the truth is that the expected length of your life will heavily impact your retirement planning forecasts. The longer your life expectancy, the greater the expected retirement costs.
After reaching age 65, one in three women and one in five men will live beyond 90 years. Before you can estimate how many years you’ll spend in retirement, you must determine when you wish to retire. You should use realistic life expectancy averages as much as possible. Base your assumptions on your personal health history and family history of longevity.
You can use an average life expectancy of 76 years for men or 81 years for women. If you’re unsure how long you’ll live or if your retirement date is variable, there are several different retirement scenarios that can help you determine how long your money will last.
3. How much should you have saved for retirement?
If you have five years or less until your desired retirement age, you should create a practical retirement budget plan. The best way to think about budgeting is to consider your lifestyle and ask yourself questions such as whether you plan to maintain your current standard of living or if you’ll need more money to fund your retirement adventures.
If you don’t have a specific retirement plan or if you don’t know when you want to leave the workforce, simply focus on the things you enjoy doing currently. Your personal definition of retirement might merely be an opportunity to dedicate more of your time and resources to the things you enjoy doing today.
Studies indicate that the average expenses of retirees range from 70% to 85% of pre-retirement income. You can adjust this target upwards or downwards, depending on whether you want to maintain a more active or a more frugal lifestyle.
It’s important to keep in mind that this figure is only a rough estimate. Reviewing your current and future budget is a more reliable way to know the amount of income needed. Many other factors, such as planned lifestyle expenses, future inflation rates, expected healthcare costs, and whether you will be debt-free, all affect the total amount of savings required to fully fund retirement.
4. How much should you save today?
The answer
The easy part about this question is saving as much as possible. To replace about 80% of your income before retirement, you typically need to save around 10-20% of your income throughout your working years. This can be challenging if you are early in your career or focused on paying off high-interest debt.
If you can’t save what you want today, try to contribute at least up to the employer’s matching contribution. When you’re ready to increase your savings, run a basic retirement estimator to evaluate the actual target savings amount and get back on track.
5. How much can you afford to spend annually once you retire?
Traditional wisdom among financial planners is based on a “safe withdrawal rate” of 4% annually. The 25x rule is similar to the safe withdrawal rate. The theory behind it is that you need 25 times your income in the first year to fund your retirement nest egg.
For example, if you have annual retirement expenses of $50,000 that are not covered by specific income sources like Social Security or pensions or other income sources, you will need $1.25 million (25 times $50,000) to reach that income goal. Remember, this is a general guideline and the term “safe withdrawal rate” can be very misleading.
Conclusion
Perhaps the most important thing is to remain flexible during the early retirement years, as your withdrawal rate will depend on the sequence of investment returns and inflation rates during the first 10 years of retirement.
It may not be surprising that retirement planning is the number one financial planning priority for the majority of American workers. Unfortunately, most of us spend more time planning a big trip or large purchase than planning for retirement. The good news is that the entire planning process can be much less stressful if you simply focus on these five important questions as you approach retirement.
Source: https://www.thebalancemoney.com/five-important-retirement-questions-you-need-to-answer-4025465
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