Determine How Long Your Retirement Savings May Last 

Due to increasing life expectancies and unplanned expenses, many individuals may run the risk of outlasting their retirement savings. The great news is longevity rates are increasing, which means on average people are living longer. The not-so-great news is that you may now outlast your retirement savings because your retirement may last as long as 30 years or more. How do you ensure that your savings lasts as long as you do?

One of the easiest ways to determine your desired annual retirement income is as a percentage of your current income. Your current income supports your present lifestyle, so reducing that income by a specific percentage may reflect certain expenses you'll no longer pay (i.e., payroll taxes). Therefore, a common assumption people use to estimate projected retirement income needs is 70% to 80% of their current income.

However, maybe you’re planning to spend more in retirement, possibly by traveling or even upgrading your home? Then you may need more than 100% of your current income. So while it’s fine to use a percentage of current income, it’s best to review all of your current expenses in detail and think carefully about how these might change as you transition into retirement.

What’s your vision?

First, carefully consider what kind of lifestyle you will have in retirement. Clearly envision what an average day will be like for you to help determine what kind of expense will be associated with it. Factors to consider are:

  • Housing: Is your mortgage paid off or not, will you relocate, downsize?
  • Work-related expenses: Will you eliminate the need for nicer clothing/dry-cleaning and commuting costs?
  • Savings: Will you still make retirement savings contributions or have payroll taxes?
  • Health care: When are you eligible for Medicare; do you have a supplementary plan in place?
  • Long-term care: Have you thought about the possibility of an extended nursing home stay?
  • Entertainment: Will you eat out more, or less?
  • Children/parents: Are you responsible financially for others? Could that change in the future?

The role of inflation

Inflation is the risk that the purchasing power of a dollar will decline over time, due to the rising cost of goods and services. If inflation runs at its historical average of about 3%, the purchasing power of a given sum of money will be cut in half in 23 years. 

If it jumps to 4%, the purchasing power is cut in half in 18 years. Therefore, to outpace inflation, you should try to have some strategy in place that allows your income stream to grow throughout retirement.