Inside Money: How much money do you need to retire?

Retirement is an exciting and scary proposition. Leisure time. Travel. New hobbies. Doing whatever you want, whenever you want.

But it all costs money. Costs for your regular bills. Costs for medical care. Costs for everything. To prepare for losing a paycheck, everyone wants to know: “How much money do I need to retire?”

They’re asking the wrong question. And it’s not that simple. Having a million bucks in a retirement account doesn’t mean much. Neither does having $2 million, or more. The real question?

“How much will I spend when I retire?”

EXPENSES VS. INCOME
Monitoring your expenses pre-retirement is relatively simple. You can track what you spend — every dime — by using a simple notebook, an online program or a smartphone app. But by the time you retire, your expenses could change considerably.

Some costs will be lower. Perhaps your mortgage will be paid off. Maybe tuition payments will be over. No more commuting costs. Other bills may increase. You’ll have more free time, so you may dine out more, travel more, enjoy your hobbies more. That will mean more money going out.

To estimate what you may spend in retirement, you need to create a new budget. Take your current spending plan and determine which expenses will stay the same. Which ones will go away. Which ones will go up.

Next, look at your anticipated income sources in retirement. You may be one of the lucky ones who can expect a pension. Then there’s Social Security. Finally, you can tap your investments, if you have any. If your income sources aren’t enough to pay your estimated retirement bills, consider working longer. Each year you work gives you more money, and more chances to save in retirement accounts.

If full-time work isn’t your thing, consider part time. This could be enough to supplement your other income sources, pay the bills and perhaps delay you from taking money from your investment accounts — giving them more time to grow.

If it’s still not enough, here are some strategies to help you.

HOW TO GET THERE
Yes, we know you have bills. Yes, we know you haven’t gotten a raise in years, maybe your spouse was unemployed for a while. And yes, prices for all kinds of stuff keep rising, and for years, the stock market hasn’t been helpful.

The only answer, outside of working longer, is to increase your rate of savings and spend less. Here are some smart steps to help get you ready, no matter how many years away you are from retirement.

Cut daily costs: Pay close attention to your budget and see if you can cut back. There are probably many changes you can make without sacrificing your lifestyle. Do you really need Starbucks every workday? A $5 daily expense adds up to $1,300 a year. Make your own coffee and bank the rest. Same goes for lunches out, dry cleaning and other items that are really luxuries, not necessities. The key here? Save those extra dollars for retirement. A little sacrifice now will make retirement more comfortable.

Look at long-term expenses: Check into refinancing your mortgage, even if you’ve done so recently. Also re-evaluate your car and homeowners insurance. And once your kids are out of college and your mortgage is paid, you may no longer need life insurance. Earmark any savings to a long-term account.

Delay big purchases: If you’ve paid off your car loan and you’re considering a new vehicle, put it off. Bank the amount you would be paying for your car loan and set it aside for retirement.

Increase 401(k) contributions: If you’re lucky enough to get a raise and you’re not already maxing out your 401(k), increase your contributions with the raise money. You won’t even miss it. Plus, saving to a pre-tax work retirement account will lower your tax bill.

Set up auto-savings accounts: Most banks will allow you to set up an automatic transfer of money from a checking account to a savings account. Some even offer programs that will send $1 to a savings account with every debit card purchase, or they’ll raise every transaction to the nearest dollar, sending the extra to savings. Yes, it’s small change, but every bit helps.

CONSIDER SOCIAL SECURITY STRATEGIES
If you’re married, look into ways to delay the benefits for the higher-paid spouse and collect earlier for the lower-paid spouse. Each year you delay receiving benefits, the more you’ll get when you actually collect.

Remember growth: You may think that in retirement you need to protect your savings from the risk of the stock market. Of course, you want to preserve what you can, but staying safe will give you a new risk: loss of purchasing power. As time goes on, inflation will take a big bite out of your budget. To counter that, make sure some of your portfolio is in investments that can outpace inflation. With today’s low interest rates, this means you’ll need to expose part of your savings to equities. For help, consider hiring a fee-only certified financial planner. To find one in your area, check out the Financial Planning Association of New Jersey (fpanj.org) or the National Association of Personal Financial Advisors (napfa.org).

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