You’d think that as we got older, we’d do a better job of getting a grip on our finances. And while it’s true that many of us will improve in that arena as we age into our 30s, 40s, 50s, and even 60s, new data from Transamerica suggests that we might regress once retirement kicks in. That’s because 36% of today’s seniors say their financial situation has declined since entering retirement. And to some degree, that makes sense.
Unless you’re willing to work in some capacity during retirement, leaving the workforce generally means moving over to a fixed income. The problem, however, is that life’s expenses often aren’t fixed, and it can be difficult to navigate that glaring disconnect. To avoid a scenario where your finances decline in retirement, here are a few steps you must take.
If there were a single magic savings number that guaranteed financial security in retirement, we’d all have a set goal to aim for. But that’s not the way retirement works. The amount of income you’ll need will depend on a host of factors, from lifestyle choices to your health, so as you plan for the future, assume that you’ll need about 80% of your pre-retirement income to live comfortably during your golden years. This means that if your ending salary is $100,000, you should, ideally, have access to about $80,000 a year in income.
Now your retirement income doesn’t all have to come from savings. Chances are, a decent portion of it will come from Social Security. Once you figure out what that amount is (which you’ll find by logging onto the Social Security Administration’s website and inputting your personal details), you can work backward from there to determine how much savings you’ll need.
How do you do that? A good way is to use the 4% rule. The rule states that if you begin by withdrawing 4% of your nest egg’s value during your first year of retirement, and then adjust subsequent withdrawals for inflation, your savings should, in theory, last 30 years. While it’s certainly not a perfect rule, it’s a decent starting point to work with.
Going back to our example, say you expect to need $80,000 a year in retirement income, $30,000 of which will come from Social Security. That means your nest egg will need to produce $50,000 a year. If you multiple $50,000 by 25 as per the 4% rule, you’ll arrive at a savings goal of $1.25 million.
Again, this isn’t a perfect formula. But it will give you a sense of how well your nest egg will hold up in retirement. For example, if you’re 65 years old earning $100,000 a year and are looking to retire within the next few months, you might hold off if you only have $950,000 in savings and work a few more years to pad your nest egg instead.
Just as it’s important to follow a budget during your working years, so too