This assumption could ruin your retirement plans

This assumption could ruin your retirement plans


(Maurie Backman)

One of the tricky things about retirement planning is that it’s hard to estimate your living costs years in advance. Imagine you are over 30 and trying to figure out how much your pension can cost. At this point, you may be 35 to 40 years away from this milestone. How on earth should you keep the numbers when we don’t know what inflation has in supply for health care, housing and other expenses you may face?

In addition, you may be too young to have a clear idea of ​​what you want your pension to look like. You can think you will be happy when you spend your senior years traveling the world. But as you get older, the idea of ​​staying closer to home can be more appealing.

That is why retirement planning is difficult – there is no doubt about that. But one assumption you shouldn’t make when you’re planning to retire is that as a senior, you’ll be able to make do with a fraction of the income you’re used to living on. In fact, you should actually plan to replace most of your income during retirement – no matter what your particular lifestyle ultimately looks like.

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Do not lower this estimate

Some people assume that after retirement, they will live on one-third or one-half of their income. But this is a mistake.

A lot of the basic expenses you pay today are the bills you are willing to spend during your retirement. So at least you should assume that once you stop working, you will need about three-quarters of your current income to make do.

In fact, if you already have higher retirement goals that involve a lot of travel, you may want to assume that you will need the same income during your senior years. And that will require a decent amount of savings. The good news, however, is that if you give yourself enough time to build a nest, you can get into a solid position where you can fully replace your pre-retirement income.

Let’s say you start funding an IRA or 401 (k) plan at the age of 30 with $ 500 a month and do so until the age of 67. This is the full retirement age for Social Security if you were born in 1960 or later.

If you invest much of your savings in stocks, there is a good chance that your investments will generate an average annual return of 8% over those 37 years. This is actually a little below the average of the wide market. And if so, you’ll be looking at a nest worth over $ 1.2 million.

And speaking of social security, remember that you will have the monthly benefits that you can look forward to. They will not be enough for a living, but if you do everything you can to rank them strategically, they can serve as a generous source of income in addition to the money you save.

Do what you can

It is extremely difficult to quantify the cost of retirement decades ahead. Therefore, it pays to make mistakes on the part of the need for a large replacement income. You can set up to replace 85% of your previous earnings to manage 70%. But this is a much better scenario than one that will limit you to money because you have not spared enough.

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