According to the Employee Benefit Research Institute, less than half of American workers have performed a retirement needs assessment. It’s extremely difficult to plan for retirement if you don’t even know what you will need to retire.
It’s true that you probably won’t be able to pinpoint exactly what you will need during retirement, but the reality is that you can get a general idea, and then plan for that. And it makes sense to do so. After all, how can you ensure a comfortable retirement if you haven’t even run the numbers?
What Will You Need in Retirement?
Many of us get hung up on the idea of having a “retirement number.” This is an amount that we think will provide the necessities of life during retirement. For many people, this amounts to building up a nest egg of $1 million, or even more.
However, just looking at retirement in terms of a single number probably isn’t going to cut it when it comes to overall retirement financial planning. Instead, you need to consider other factors that relate more to your lifestyle than getting too hung up on a specific number.
Some things to consider as you plan for retirement include:
- What do you want to do with your time?
- What type of lifestyle do you prefer?
- What will you buy during retirement?
- Have you thought about health care costs?
- Do you know what impact inflation will have on your future?
If you want to be able to travel during retirement, it’s going to come with different costs than if you decide to stay at home most of the time. An expensive hobby, like playing golf a lot, often requires more money than a less expensive hobby, like fishing.
Giving thought to what you want your life to look like in retirement is an important part of planning for the future. Estimate how much you are likely to spend in retirement, and that will give you place to start from when you start figuring out how much to save now.
What About Focusing on Monthly Income During Retirement?
In some cases, it makes more sense to worry less about hitting a specific number in your nest egg and think more about how you will build up the necessary monthly income during retirement.
Can you build up assets now that will provide you with an income stream later? This is an important point to think about. Your tax-advantaged retirement account might take a hit just before you retire. Perhaps Social Security benefits are going to continue to be cut in the future. And there is a very good chance that you won’t have a pension plan to rely on, especially if you are just starting in the workforce now.
You don’t want to rely too heavily on any one source of income for retirement. This is where income diversity comes in. What can you do now to diversify your assets? Yes, you should set money aside in tax-advantaged retirement accounts. But can you do other things, like start a business that will provide you with income, or consider investing in real estate and becoming a landlord.
Rather than just relying on one or two sources for your retirement income (as many people rely on tax-advantaged accounts and Social Security), it makes sense to have three or four different sources for retirement income. If you start cultivating these options now, you will be more likely to do well in retirement, and support the lifestyle you prefer.
And don’t forget to start saving for retirement now. It doesn’t matter if you only have a small amount to set aside right now. The important thing is that you look ahead to the future, and that you get your start so that compound interest has more time to work on your behalf. Once you get started, and as your finances improve, you can start building your assets so that you will have diverse revenue sources in retirement.
What do you think? What are you doing to prepare for retirement?