In a 2019 Charles Schwab survey, Americans guessed that they would need $1.7 million to retire.
However, only half of the same people who took that poll contributed less than 10% of their earnings to a workplace retirement fund, or less than $9,000 annually.
It’s never a good idea to guesstimate a retirement plan. Here are four basics you can’t afford to mess up.
Choosing the wrong retirement number
Too many retirees think of the act of retirement and not enough about the financial considerations and calculations that make it possible in the first place.
A retirement number is the amount of money that must be in your retirement fund to fund the entirety of your retirement.
The average person lives to be 80 if they’re lucky. So, as you calculate your retirement number, you may want to consider that you could live to be 90 or 100. Otherwise, you could outlive your own retirement fund.
And a 2016 Federal Reserve report found that the typical retirement account only had $60,000 in it.
Considering inflation and the rising cost of living expenses, you may need $3 million to retire depending on your desired lifestyle.
A retirement number should never be a generalized estimate figure; it is a specific and customized number that will inform your retirement lifestyle.
Carefully calculate your retirement number with a financial advisor or retirement professional.
Not having a complete retirement plan
A retirement number is not very useful if you don’t have a retirement plan. A retirement plan informs how you will live out your retirement and spend your funds.
Where will you live out your retirement? The typical retiree spends $40,000 to $45,000 annually. Would you save more money if you live in a city or country with a low cost of living?
Are you planning to work part-time? Will you have an emergency fund?
You must think of questions and contingencies to flesh out a retirement plan and better determine your retirement number.
Not including medical expenses in a retirement plan
As you get older your body will slowly break down. The older you get, the more likely you will get sick, injured, contract an ailment or need medical care.
And the older you get the more expensive medical care becomes. For whatever reason, many retirees don’t include medical expenses in their retirement numbers or plans.
The average retired couple will spend at least $400,000 on medical care throughout the entirety of their retirement.
Most people struggle to create a retirement fund, much less add $400,000 to it.
The least you can do is open a health savings account. It is basically a bank account for medical expenses. As long as you withdraw money from a HSA for medical treatment, it’s tax-free.
Withdrawing too much from a retirement fund
There are serious penalties, fees, and taxes that must be paid if you withdraw money too early from a retirement fund.
If you have retirement funds in a personal bank account, then you must only withdraw what you need as you need it.
Develop a budget and fund withdrawal schedule in accordance with your retirement plan. Withdraw too much or frivolously and your fund could be empty or inadequate when you really need it.