How Long Should Retirement Savings Last?

Retirement has always been one of the biggest financial goals that people save for. You must save enough for a comfortable retirement without giving up on having an enjoyable life now.

However, as life expectancies lengthen, predicting how long you will need to make those savings last can be challenging.

This article will explain how to calculate a good estimate of your retirement savings and cover some of the most vital factors to consider when planning for retirement.

How to Calculate Retirement Savings

One of the most common rules of thumb to estimate retirement needs is the 25x rule. This states that you should save 25 times your planned annual retirement expenses. As a result, you would have enough funds for a lengthy 25-year retirement.

For example, if you plan to live on $60,000 annually, multiply $60,000 by 25 to arrive at $1,500,000. That means you should aim for a retirement savings balance of $1,500,000.

This is just a general rule of thumb. Investment choices and other factors can impact your efforts. Consider using a 401k calculator to better understand your retirement savings needs.

Things to Consider When Planning for Retirement

Several factors can impact how long your retirement savings will last. Here are a few to consider:

Inflation

Inflation affects your efforts to save for retirement and your overall financial picture once you retire.

When saving for retirement, inflation rates can impact your investment returns by influencing the markets. For example, markets could potentially fall during higher inflation and rising interest rates. This, alongside inflation itself, could hamper retirement savings if you don’t select the right assets.

In retirement, inflation can impact your savings and your living expenses. If inflation increases, your regular expenses may increase while your savings drop.

In both cases, accounting for inflation when selecting investments is vital.

Taxes

Taxes become a much more prominent piece of your financial planning in retirement since you may have multiple income sources. You can potentially minimize your tax burden by strategically saving in tax-advantaged retirement accounts.

Your workplace plan is a good place to start. These let you save pretax, reducing your taxable income. Your employer may also pay a matching bonus up to a certain amount — this is free money, so reaching your matching limit is a good idea.

After that, look into individual retirement accounts (IRAs):

• Traditional IRAs: Qualifying contributions are tax-deductible, but retirement withdrawals are taxed as ordinary income.
• Roth IRAs: Contributions are post-tax, but qualifying retirement withdrawals are tax-free.

Saving in tax-advantaged accounts and carefully planning your withdrawal strategy could save you significantly on taxes.

Location

Location impacts your retirement in two ways — the cost of living and taxes.

Living in an area with lower living costs can slash your living expenses and stretch your budget further. You could save less to meet your goals or live a more lavish retirement.

Alternatively, some retirees want to live in areas with higher living costs to access more amenities. You’ll have to save more to live an enjoyable retirement here.

Furthermore, some areas tax your retirement income more than others. You must also account for sales taxes, property taxes, and more. All of these may lead you to relocate in retirement.

Healthcare Costs

As we get older, we often need to visit medical providers more often to stay healthy. Although you qualify for Medicare at 65, it may not cover all your expenses.

Consider getting a separate health insurance policy or supplemental policies like dental and vision insurance to ensure adequate coverage. If so, you’ll need to save extra to budget for premiums.

The Bottom Line

Predicting exactly how long retirement will last is nearly impossible. However, the 25x rule is a good starting point. If you retire at 65, you could potentially have enough to live until 90 — well beyond the average life expectancy.

However, everyone’s goals and future situations will differ. Consider factors like inflation, taxes, retirement location, and healthcare costs to hone in on a solid retirement figure to aim for.

Sources:

https://www.who.int/data/gho/data/themes/mortality-and-global-health-estimates/ghe-life-expectancy-and-healthy-life-expectancy#:~:text=The%20estimates%20confirm%20the%20trend,to%2073.4%20years%20in%202019.