If you’re like most people, you probably have a number in mind when it comes to a target for your retirement savings. But is that number accurate? According to a recent study from Fidelity Investments, it probably isn’t. The study found that 75 percent of those surveyed underestimated the amount of money they would need to fund their retirement.1
It can be difficult to tell whether your retirement savings target is accurate because there are so many unknown variables. After all, it’s impossible to know how long you will be retired. You don’t know what the economy will be like during your retirement or how much certain items will cost. You can’t predict things like medical issues or other emergencies.
While you may not be able to predict your retirement funding needs with complete accuracy, you can create an informed estimate. That estimate can guide your savings and investment decisions and help you better track your progress toward your goals.
Not sure if your savings target is accurate? Below are three steps to help you better understand your retirement funding needs:
Create an estimated retirement budget.
Your savings target shouldn’t be based on an arbitrary number, but rather on your planned spending in retirement. Take time to develop a projected budget based on the lifestyle you would like to lead in retirement.
Again, you may not know the costs for every item, but you can likely estimate amounts based on what you know today. Also, identify costs you could cut if you fell short of your savings goal. For instance, perhaps you could downsize to a smaller home or cut back on vacations to reduce your planned spending.
Plan for out-of-pocket health care costs.
You might think Medicare will cover most of your health care costs in retirement. While Medicare is a valuable resource, it doesn’t cover everything. In fact, Medicare only partially covers some treatments and doesn’t provide any coverage for some costs.
Fidelity estimates that the average retired couple will spend $260,000 on out-of-pocket health care expenses in retirement.2 That figure includes things like premiums, copays, deductibles and much more.
Include health care costs in your budget, and think about how you will pay them. You may find that your current savings strategy isn’t sufficient to fund your lifestyle and potential out-of-pocket health care costs. Consider saving money in a health savings account (HSA) or buying supplemental health care coverage to offset the expenses.
Remember to budget for inflation.
Inflation is easy to forget but too important to ignore. It’s the gradual, incremental increase in the price of goods and services from year to year. Usually, inflation is relatively modest. However, even modest inflation can have a big impact over time.
Consider that 3 percent average annual inflation compounded over 24 years would lead to a doubling of prices. How much more money would you need to save to withstand a doubling of your cost of living throughout retirement? If you hadn’t accounted for inflation in the past, you may find that your current savings strategy isn’t sufficient.
Ready to estimate your retirement needs? Let’s talk about it. Contact us at First Fidelity Group today. We can help you develop and implement a strategy. Let’s connect soon and start the conversation.
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16925 - 2017/8/25
First Fidelity Group
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