Many adult Americans have inadequate savings to meet the needs of their retirement years, and their savings plans are not always on track to catch up. Many may have their hands full just meeting regular monthly expenses. However, you might actually need less than you think you’ll need for your later years.
Decide when you plan to retire. Some adults work into their 70s. Others stop when they turn 65 or earlier. If you love your job and prefer to keep active, you may want to continue working a little longer. If you have health problems that make it difficult for you to go to your workplace every day, you might desire to retire as soon as possible.
Anticipate your likely income from all retirement sources when they begin paying out, such as Social Security, pensions, retirement plans and interest on investments. This will depend on how much longer you plan to work and how much you anticipate contributing to these funds by the time you retire. You can access a benefits calculator on the Social Security Administration's website. Find a link in the References section.
Examine your current monthly budget, then deduct the expenses that are likely to drop off by the time you retire. The expenses you can expect to lose by retirement age might add up to 40 to 60 percent of your current budget. For example, you might pay off your mortgage before you retire, so you would no longer have that payment, or you might decide to downsize to a less expensive home. Maybe you’ll pay your automobile off by then, too, and you don’t plan to replace it with a brand new model.
Add to your estimated budget any new expenses you can expect to take on as you age. For example, if you don't upgrade to a new car with a monthly payment, figure on spending more for repairs and maintenance. Keep in mind that Medicare is not likely to cover all your medical expenses either. If you’re already paying your own health insurance premiums, this won’t make much of a difference, as long as you don’t deduct that cost from your monthly budget because you think Medicare will take over this expense for you. But if you’re currently covered by a policy provided by your employer, you may lose that when you retire. You'd then need to pay for your own policy, which can be a significant monthly expense. Basic Medicare covers only the costs of hospitalization and some nursing home time, so most people buy supplemental Medicare insurance to cover such things as doctor visits and drugs.
Calculate the difference between what you’re likely to spend per month when you retire and how much of that your retirement plans and Social Security will probably cover. Ideally, your anticipated income will be equal to or slightly more than your anticipated budget. If there’s a shortfall, you'll need to save up the difference before you retire.
Estimate what you’ll need to cover the shortfall, if one exists. If it looks like you’ll be short by $500 per month, this adds up to $6,000 per year. Multiply the yearly deficit by the number of years you expect to live off your retirement plans and savings. According to Bank of America, the average man has a life expectancy of 82 years. If you retire at age 65, and if you live until age 82, you can expect to cover 17 years of retirement. Seventeen years times $6,000 per year comes out to $102,000. You'll need to save this to make up the difference between your estimated budget and your projected expenses.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.