How Much Does It Cost to Retire?

How much money will you need when you are ready to retire? It’s a tough question, but one we all must consider at some point. 

Retirement planning is a lifelong pursuit, and to achieve your retirement goals, you need to have a target in mind. Even if that amount changes over time, aiming for an objective can help you understand if you’re on the right track with financial planning as you build retirement savings.

How do you calculate your real financial needs for retirement? There are a few ways to answer that question, so we’re offering expert insights on funding your retirement.

The Truth About Retirement Costs

When most people think about retirement expense needs, their estimates are low. Often, they make the mistake of thinking that the cost of living will be substantially lower in retirement. They can also fail to consider factors such as inflation and the rise in the cost of living. To put it in perspective, almost half of retirees (48 percent) believe they don’t have enough savings to last their retirement, and a whopping 57 percent were surprised by how much it actually costs to retire.

Most experts say that you need 70-80 percent of your present income to live comfortably in retirement. The rationale is that when you retire, you will no longer be putting away that 10-15 percent of your income. Plus your taxes are typically lower, and you’ll be saving on certain everyday costs such as commuting to work.

Determining How Much You’ll Need

Naturally, the average percentage of income that Americans deposit into their retirement fund varies significantly by age. However, as a general rule of thumb, Fidelity claims that those who save 15 percent of their income starting in their mid-twenties will likely have enough to retire comfortably. 

To get a general idea of what you need to save for retirement, you could use an interactive retirement calculator. These online calculators can provide basic projections based on income, the amount you need to save, and when you plan to retire. Of course, these calculators only provide a rough idea of how much you need to save.

To more accurately calculate how much money you need to retire, you need to do the math:

• Calculate exactly what you expect your monthly living expenses to be, including housing, healthcare, utilities, food, and anything else you can think of.
• Be realistic about your retirement budget and consider costs such as dining out, visiting the grandkids, or having extra cash if your children need it.
• Consider adding in extra savings for unanticipated expenses, and rethink your possible healthcare costs.

Understanding Your Social Security Benefits

Although Social Security will supplement your retirement income, it won’t be enough by itself. So, when should you start collecting your Social Security? The answer is different for each person because it heavily depends on one’s financial situation and retirement goals.

Before you decide when to collect Social Security, take a look at your retirement savings. Do you have enough to retire comfortably if you include Social Security? Remember that the average person needs about 70 percent of their pre-retirement earnings in order to live comfortably in retirement, and Social Security will only make up about 40 percent. 

No matter what your retirement plan includes, it’s essential to understand the potential impact of Social Security on your retirement budget and lifestyle. By determining how much you are eligible to collect, you can plan ahead and decide when it will be right for you to start taking advantage of Social Security.

Social Security: A Quick Lesson

The Social Security system was created during the Roosevelt Administration in 1935—the height of the Great Depression—as financial aid for the elderly and unemployed. In our current system, benefits are issued at retirement after a lifetime of payments into Social Security.

Those born in 1956 or earlier are already eligible for the full Social Security benefit. The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age gradually increases for those born between 1955 and 1960, until it reaches 67. For anyone born in or after 1960, full retirement benefits are payable at 67 years of age.

Calculating Your Social Security Benefits

Unlike private pensions, which are pre-funded, Social Security is a pay-as-you-go plan administered by the federal government, which deducts funds from your paycheck. How much you qualify to receive in Social Security payments is determined by the amount you pay into the system, the number of years you contributed, and how early you choose to collect benefits. 

Here’s how the basic Social Security formula works. First, the Social Security Administration (SSA) calculates your average indexed monthly earnings (AIME), which averages your 35 years of employment with the highest earnings adjusted for inflation, and then divides this amount into monthly lifetime payments. Your AIME is used to calculate the primary insurance amount (PIA), which is matched to your age to determine your benefits. 

If you wait until you qualify for full benefits, then you will receive the full monthly allowance. If you elect to retire before or after full retirement age, then compensation is adjusted. Once you start collecting Social Security benefits, there also is a cost of living adjustment (COLA), which is 3.2 percent as of 2023.

Remember: Social Security Won’t Pay for Everything

Keep in mind that the 70 percent estimate of your pre-retirement spending is just that—an estimate. Make sure to develop a revised household budget that includes all anticipated retirement expenses.

To supplement your Social Security benefit and save more for the future, try looking into the following account types:

• Individual retirement accounts (IRAs)

• Certificates of deposit (CDs)
• Money market accounts & savings accounts

• 401(k) and workplace pension programs

Developing a Smart & Secure Retirement Plan That Supports Your Goals

Creating a realistic retirement strategy isn’t easy, but you don’t have to do it all by yourself. You can consult a professional financial advisor for help making the most of your retirement savings. 

First State Community Bank has numerous experts on staff who specialize in retirement planning. Plus, we offer plenty of resources such as our comprehensive guide, Staying the Course: Retirement Planning Strategies During Uncertain Times, to get your retirement plan on track. 

Reach out or browse our blog archive for more information on retiring with ease.