Having the right expectations will help you plan for a better retirement
It’s only natural to want to have “Great Expectations” about retirement. But that kind of thinking may only get you into trouble once retirement is upon you. To find the right path, you need to know where you’re going. What do you want your retirement years to look like? Do you want to travel? Pursue that hobby you’ve never had time for? Spend time with the family? Move to the beach? Or to the mountains? We’re all different, and our personal retirement goals are just as different.
Determine Your Target Annual Retirement Income
Most retirement planning experts believe that the average retiree will need 75-80% of their pre-retirement annual income during their retirement years. But are you average? Your expenses will change over time. Consider these factors:
You’ll need less than 100% of your annual pre-retirement income if:
- Your mortgage is paid off
- Your are not supporting dependents
- Your have no work-related expenses
- Your are no longer saving for retirement
You’ll need more than 100% of your annual pre-retirement income if:
- You plan to buy a second home
- You plan to spend more time traveling
- You require additional medical care
Social Security Isn’t Enough
As long as the Social Security system remains stable and funded, you can expect Social Security to provide up to 38% of the income you’ll need in retirement. In order to make up the difference, you’ll need to set aside money during your working years to grow your personal savings.
Inflation Is Not Your Friend
No doubt you’ve heard about penny candy and nickel sodas. Don’t you wish a soda cost a nickel now? That’s inflation working against you. Since 1984, inflation has averaged between 3 - 3.5% per year. If this trend continues, something that costs $100 today will cost $180 in 20 years. These rising prices mean that you will need more money in retirement if you want to maintain your current lifestyle.
Living Longer Means A Longer Retirement
Healthy lifestyles and modern health advances allow people to live longer. As we live longer, we need our retirement savings to last longer. Make sure you don’t outlive your savings—be sure to set aside enough money during your working years to last throughout your retirement.
Setting the Right Expectations about Returns
Perhaps the most important investing principle to remember is to set realistic and logical expectations for your investment returns. Although some investment options available in your retirement savings plan will produce unusually large rates of return in certain years, rarely—if ever—are these returns sustained for prolonged periods. If you expect higher returns than are realistic, you will end up under-saving for your retirement. Part of setting the right expectations is to discover and recognize the type of investor you are—can you handle risk? Do you prefer to keep it simple? Do you have a long time to invest or only a few years? Knowing this will make saving for retirement rewarding and less stressful.