You’ve probably heard that you need to save enough to count on 80 percent of your pre-retirement income to cover your expenses in retirement. You may also know the 4 percent rule, which says that if you can keep to annual withdrawals not exceeding 4 percent of your retirement savings balance, your savings should last for 30 years or more.
Those rules of thumb focus mainly on ensuring that you save enough funds for retirement.
And although it’s almost never a bad idea to be overly prepared, and it’s probably safe to say that no one in the history of the world has ever wished they had saved less money for their golden years, it’s also true what they say about not being able to take it with you when you go.
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So consider this: While you’re working and saving and preparing for that future, what if you actually are saving more money than you’ll ever truly need in retirement, and therefore sacrificing unnecessarily now? Wouldn’t you want to know so you could make adjustments, and possibly enjoy more financial independence in your pre-retirement years?
A survey of recent retirees indicates 80 percent of your annual pre-retirement income might be significantly more than you need to live comfortably and happily in retirement. Results showed that 66 percent were living on an average of 66 percent of their pre-retirement income, and 85 percent said they didn’t need to spend as much to be satisfied as they did before they retired. In addition, 57 percent said their lifestyles were just as good, if not better, as when they were working.
When it comes to retirement, figuring out how much money you’ll need can be a tricky task. To get the most accurate estimate and therefore stick to the best savings plan, you really need to do more than just gather data and crunch numbers. You also need to envision your retirement lifestyle, figure what expenses you’ll realistically face, and consider the impact being retired will have on changing your tax liabilities.
It sounds complicated, but it doesn’t have to be. Let’s talk through a few important points.
Lower cost of living
There are two prongs of attack here.
The first is taking the cost of living at face value. Of course, it goes without saying: If you live in or move to an area with a low cost of living, your retirement expenses will be lower than if you lived in an area with a higher cost of living.
The other factor is a little bit more complex. If you reduce your expenses and/or lower your cost of living, you require less income, which means you’ll pay less in income taxes.
In other words, the less you need to live on, the less you’ll have to take from your retirement accounts. The less taxable income you have, the less you’ll pay to Uncle Sam. This can add up to thousands, even tens of thousands of dollars every year.
Reduced or eliminated housing expenses
When you look at your current monthly budget, housing is more than likely your single biggest expense.
So if your retirement plans include paying off your mortgage, selling your home and downsizing, moving in with family, there’s an excellent chance your housing expenses in retirement will be lower - or even eliminated altogether - than they are right now.
Plans for retirement aren't expensive
If you’ve always wanted to buy a big, fancy motorhome and travel the country, take monthlong river cruises on all seven continents, and enjoy every meal at fine dining establishments, this article may not be for you. In fact, you might need more for retirement than you think.
But if your retirement plans are more down-to-earth and include more things like spending time with your grandkids, volunteering in your community, digging into new hobbies, and starting a book club, you may find certain line items in your budget coming in low.
For example, with a simple retirement, you’ll probably continue eating most of your meals at home, rather than going out to eat for $50+ every time. And just think about how much you’ll save if you take up a hobby like gardening in retirement rather than online shopping, or take annual vacations rather than quarterly.
Lower taxes/tax bracket
Many people find themselves in a lower tax bracket once they retire than when they were working. In fact, some plan very carefully for that to be the case. Being in a lower tax bracket means you’ll pay a lower percentage of your income in federal and state withholding tax.
Your healthcare costs may or may not decrease, based on a number of factors including the number of dependents you have, how much your premiums were when you were working, and your Medicare qualification.
At the age of 65, you can begin claiming a higher standard deduction or deduct certain unreimbursed healthcare expenses over 7.5 percent of your income. This is a lower threshold than for those under 65 who must spend 10 percent of their income before being able to deduct the expenses.
Also, once you are retired, you’ll no longer be responsible for the employee’s 7.65 percent payroll tax contribution to Social Security and Medicare, and you’ll no longer have payroll deductions for things like life insurance and short-term disability coverage. You’ll still have to pay Social Security and Medicare tax (FICA) on earned income, but in retirement, you’ll mostly be living on non-earned income (dividends, interest, distributions, pensions, Social Security).
If you’re still feeling like a deer in the proverbial headlights with regard to how much you’ll need in retirement, or if you’re worried you might indeed be saving too much, talk to your financial advisor. He or she can walk you through the process of estimating your financial needs in retirement or review your current plan with these thoughts in mind, to see if you’re on track to have more in retirement than you need. If that’s the case, you can make some adjustments to enjoy a bit more financial comfort in the here and now.
At PAX Financial Group, we have more than 100 years of combined experience helping families retire in Texas – and nationwide – and one thing has become inherently clear: Everyone is different! What works for one person may not work for another. We will take the time to construct a custom retirement plan created just for you.
The team at PAX Financial Group is here to help with all of your retirement planning needs! Schedule a no-obligation conversation today.
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