Retirement Planning
How Your Spending Changes in Retirement
Household spending generally drops at retirement and then continues to decline throughout retirement. Here’s how people’s spending changes the most and how it can effect your saving plan.
3 Retirement Questions You’ll Need to Address
Published July 21, 2017
Retirement today isn’t what it used to be. A new retirement landscape demands a fresh approach to thinking about and planning for retirement.
- The human lifespan is growing, which means retirement is too. As a result, you’ll end up spending more in retirement
- It’s important to estimate how much money you’ll want to spend in retirement and where that money will come from
- Waiting to take your Social Security benefits can increase the income you receive each month
Planning for retirement is a multi-faceted process, provoking questions like “how much can I afford to spend each year?” and “when should I start saving?” With so many factors to consider, we’ve provided a quick run-down of some key retirement topics you should be thinking about.
1. How long will you live?
There’s no definitive answer to this one. Your longevity depends on a number of variables, including family history, health and lifestyle. Our sister company, Abaris’, longevity calculator, which was developed by professors at the Wharton School of Business at the University of Pennsylvania, offers an estimate, but of course, no one can predict the future.
There is, however, one fact that applies to us all: the average human lifespan is growing, and with it the span of one’s retirement is too. This means you’ll spend more in retirement and that those preparing for retirement today need a better strategy than those of previous generations.
2. How much money are you going to spend?
In order to effectively prepare, it’s important to first consider how much money you’ll need each year during your retirement. There are several approaches out there to determine this amount, but at the end of the day, the dollar figure you think you can get by on in retirement is a personal choice. To help you predict what this amount may be we’ve outlined a few tips below:
- For a quick approach, experts estimate that you’ll need 60-85% of your current household income to live comfortably during retirement. Of course, you have to consider inflation, too.
- Keep in mind that during your retirement you probably won’t be saving money or paying the Federal Insurance Contributions Act (FICA). FICA is the mandatory tax taken from workers’ paychecks to help fund Social Security and Medicare. You can think of your retirement income as being equal to your gross income today, less any money you’re saving and all FICA taxes.
- Remember to consider where your retirement income will come from. For example, if you determine that you require $50,000 per year in retirement income and that $25,000 will come from Social Security benefits, the other $25,000 must be accounted for elsewhere — from investments, your pension, income annuities, or other sources.
3. How can you optimize your Social Security benefits?
With the decline in employer pension plans, Social Security is increasingly important for retirees. It’s a simple enough system: you work at least 10 years, paying into Social Security to qualify for benefits in retirement. Your benefit level is determined using the average of your highest 35 years of earnings and a formula.
There is one big decision for you: when will you begin taking your benefits? There are three key ages: 62, full retirement age, and 70 years old. Here’s the deal with these three ages:
- 62: Collecting retirement benefits at age 62 is considered early, and, while it makes sense for some people, it comes at a cost. Taking benefits this early means a reduction in those benefits of about 25% relative to someone who waits until full retirement age to collect benefits. This reduction lasts for the rest of your life so if you can, wait.
- Full Retirement Age: How long should you wait? For most people, at least until your full retirement age, which is between 66 and 67, depending on the year you were born. At this point, you’re able to collect full retirement benefits for the duration of your life.
- 70: Finally, good things come to those who wait. Holding off on collection until age 70 opens the door to delayed retirement credits – increased income for every month you postpone benefit collection from full retirement age until age 70. For most people this amounts to about 8% per year. With longer retirements, that can be key.
Like we said, retirement planning is tricky, lacking black and white answers. By starting with these three questions you can begin to plan for a comfortable and long retirement.
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