Do you worry that you haven’t saved enough for retirement and feel unprepared? If so, you can take a small measure of comfort in knowing that most people feel the same way.
Getting a clear picture of your retirement readiness is complex, but not as difficult as you may think. Predicting the future is really just applying common sense to you retirement plan.
Traditional financial thinking says that your retirement savings will need to replace between 50% and 70% of your income in your final year of working. But that won’t tell you whether or not you’ll retire on a tight budget.
Income vs living standard
Leading retirement researcher Bonnie-Jeanne MacDonald (Dalhousie University) argues that retirement planning should focus on how much it will cost to continue your living standard in retirement. By aiming for a 100% living standard replacement rate, you are looking to buy the same goods and services after retirement as you did before.
Retirement planning should focus on how much it will cost to continue your living standard in retirement.
Your living standard is a factor of your overall earnings, your spouse’s income, the number of dependent children living with you, home ownership status, everyday household expenses, healthcare costs, and any debt you may have. It is all of the income and expenses that are part of your family budget.
To plan for retirement, you’ll need to predict how your post-retirement budget is likely to differ from your current budget. Everyday work expenses will end (like clothing, tools, commuting costs), as well as the need to set aside retirement savings. If you own a house, you may be mortgage-free by the time you retire. Basic expenses – things like food, car/transportation, entertainment, home maintenance or rent, utilities, insurance, and others – should stay about the same. And you may plan to make some lifestyle changes during retirement that will directly affect your budget, like travelling more, eating out less, downsizing your home or moving to a preferred location.
Once you have a picture of your retirement budget and income needs, you can begin to match it against how much you’re saving today and estimate whether or not you will have enough at retirement to maintain your lifestyle. Use the retirement calculator at http://silverthatch.org.ky/resources/retirement-calculator/ to help with your estimate. If there is a shortfall – your expected savings are less than what you’ll need – you can begin to look for ways to save more.