How much do you think it costs to retire?
One recent study pegged the average price tag of retirement at about $740,000. This
number seeks to include all of your expenses, from health care and housing costs to travel
and entertainment expenses.
It's a big number, but it's important to remember that this is just an average. The reality
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Is-and this is certainly what we've seen in our experience-is that the cost of retirement
will vary wildly from person to person.
There are a number of factors that will affect how much your retirement will cost, including
how healthy you are, how expensive your lifestyle will be and where you'll live in
retirement.
Perhaps the most important factor that will dictate how much you'll need to save for
retirement is the age at which you retire. The earlier you retire, the longer your retirement
will be and, therefore, the more expensive your retirement will be. Depending on how
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early you want to retire and what your goals are for retirement, this could mean you'll be
tasked with accumulating a significant number in savings before you retire.
For those who are working toward an early retirement, here are four tips to help you reach
your goal.
Save Aggressively
Those retiring early face two big hurdles when it comes to saving for retirement. First, you
have fewer years to accumulate enough in savings for retirement. Second, you need your
savings to last for a longer period of time. This means you need to save aggressively
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during your working years. A common rule of thumb is to save 10-15 percent annually for
retirement. For those saving for early retirement, a better goal may be to save at least 15-
20 percent of your income every year.
Avoid Lifestyle Creep
There is a tendency for people's costs of living to increase as their income increases during
their lifetimes. This is known as "lifestyle creep." That doesn't necessarily mean that you
have to keep your cost of living flat from year to year. Imagine you're making $50,000
and are saving 20 percent of your income ($10,000 in savings). If you get a $5,000 raise,
continue to strive to save 20 percent of income. You'll increase the amount you're saving for
retirement ($11,000) while also having $4,000 in additional income for lifestyle expenses.
Prepare for Future Risks
Life is a series of ups and down. You may not be able to prevent the downs from
occurring, but you can take steps to limit the impact they have on you. A diversified
portfolio may help you withstand a major market downturn. Purchasing good disability insurance helps protect your or your partner's income should either of you be no longer
able to work. Having a strong emergency fund gives you the flexibility to pay for a sudden
expense. Having these in place helps limit how vulnerable you are to these risks derailing
your financial plan.
Use a Health Savings Account
A couple retiring at age 65 will need to spend about $260,000 on health care expenses in
retirement according to Fidelity. It's a daunting number, and it's even larger for those who
are retiring early.
The best way to save for these costs is with a health savings account. A health savings account
allows you to make pre-tax contributions that grow tax-deferred. Plus, when you use the
money for qualified medical expenses, the distributions aren't taxed. No other vehicle
offers so many tax incentives, which is why we typically advise people max out a health savings account if they're eligible to contribute (you must be enrolled in a qualifying high-deductible health plan).
Even though we wrote these tips with those working toward an early retirement in mind,
the reality is that these strategies may be important for everyone to consider, no matter
when you plan to retire. Yet for those who want to retire early, it's even more critical you
have these elements in place to help work toward turning your dream of early retirement
into reality.
The opinions voiced in this material are for general information only and are not intended
to provide specific advice or recommendations for any individual.
