Do you know what your retirement looks like? When you want to buy a house or a car or even a special vacation, you probably can actually “see” the goal you have in mind, and that helps you plan and save enough to achieve the goal.
The same should be true for your retirement. If you can’t visualize where you’re heading, it’s hard to plan and save enough money to make sure that you get there.
Retirement is the most important financial goal you’ll ever have. If you can’t afford a car, there’s always the bus. If you can’t put enough money together to buy a house, you can always rent. And while it may be disappointing, you don’t have to take that trip you wanted. But what if you can’t afford retirement? The consequences are a lot more serious.
Planning for retirement now is more complicated than it used to be. Most of us can’t count on a pension from our employer, and many of us are thinking about continuing to work, at least part-time, after retiring from our main job. That makes saving for retirement a lot different than saving for a thing. In fact, it’s not enough to just save money, you need to plot your road to retirement.
First, create your own retirement road map, so you know where you want to go and how to get there. Second, calculate the cost of your retirement lifestyle so you can make sure you have enough money to pay for it. AARP has developed two tools to help you accomplish both steps—the Retirement Roadmap and the Retirement Calculator.
The AARP Retirement Roadmap
Start by using the AARP Retirement Roadmap at www.aarp.org/finance to figure out what you want in retirement. The results can help you think about the options available to you, and set your retirement priorities.
The Roadmap asks you 12 questions about your desired lifestyle, personal priorities and general financial status. It reflects the many ideas people have about their retirement and may help you come up with some of your own. Some people dream of leaving work behind to spend more time pursuing a hobby, volunteering in the community, or traveling. Others dream of starting their own business or embarking on a new career. Some people are in excellent health and don’t expect to spend much retirement income on medical care. Others realize that they will have ongoing medical expenses, and may need to budget for insurance to help with the bills.
Answering the questions about these types of issues will help you start to “see” your retirement, and the results will give you a sense of what it might take to get you there.
The AARP Retirement Planning Calculator
Once you have a better idea of the retirement lifestyle you want, you’ll need to figure out how much it will cost. You can estimate how much you need to save by using the AARP Retirement Planning Calculator at www.aarp.org/finance. The calculator contains three sections: an estimate of your retirement income needs, an estimate of the sources of money to fund your retirement, and your prospects and alternatives for meeting your income needs.
Retirement Income Needs
To come up with an estimate of your income needs, here are some things you need to do:
• Estimate how long your retirement will last. There’s no sure way to predict how long you’ll live. But you can make a good guess based on average life expectancy rates, your current health status, and how long your parents or grandparents lived. With this guess, go out on a limb. If you think you’ll live to 85 after taking these things into account, plan for enough money to support you at least to age 90. Don’t underestimate how long you think you will live—otherwise, you may not save enough to make your money last.
• Set a financial goal. Do you expect your retirement to cost you more, less, or about the same as life before retirement? Some expenses may go down a lot. You may have paid off your mortgage, commuting costs will go away if you stop working, you’ll stop contributing to retirement savings, and you’ll probably pay lower income taxes. Other expenses, for health care (Medicare by no means covers it all), traveling, or pursuing other interests, will probably go up.
The calculator asks you to set a goal as a percentage of your pre-retirement income. If you click on the “estimate” button for retirement income, you can come up with a figure by listing your expected retirement expenses for items such as housing, insurance and taxes. Most people need somewhere between 70% and 100% of their pre-retirement income to cover expenses when they stop working. So if you earn $30,000 and you think you’ll need 80% of that in retirement, your financial goal will be to have enough income to pay you $24,000 a year for each year in
retirement. (Check to make sure calculator includes inflation.)
Retirement Funding
This section of the calculator can help you identify all of your savings and other sources of retirement income, including retirement accounts such as a 401(k) or IRA, Social Security, real estate and investments. To figure out how much money you might actually have on your chosen retirement date, the calculator starts with your current savings and investments, then makes estimates based on your plans for future savings and investment returns.
Calculate Results
The last section of the calculator shows how close you can come to your retirement income goal, based on the choices and assumptions you made earlier about retirement spending needs, resources and investment returns. The easy-to-read colored charts as well as numbers make it very clear whether your current roadmap will lead you to your retirement goal.
If your chart shows you falling short of your goal, you can change some assumptions—such as the age you plan to retire or the amount you’ll save every month—to figure out how to create the path you need to take to arrive at your goal.
The same should be true for your retirement. If you can’t visualize where you’re heading, it’s hard to plan and save enough money to make sure that you get there.
Retirement is the most important financial goal you’ll ever have. If you can’t afford a car, there’s always the bus. If you can’t put enough money together to buy a house, you can always rent. And while it may be disappointing, you don’t have to take that trip you wanted. But what if you can’t afford retirement? The consequences are a lot more serious.
Planning for retirement now is more complicated than it used to be. Most of us can’t count on a pension from our employer, and many of us are thinking about continuing to work, at least part-time, after retiring from our main job. That makes saving for retirement a lot different than saving for a thing. In fact, it’s not enough to just save money, you need to plot your road to retirement.
First, create your own retirement road map, so you know where you want to go and how to get there. Second, calculate the cost of your retirement lifestyle so you can make sure you have enough money to pay for it. AARP has developed two tools to help you accomplish both steps—the Retirement Roadmap and the Retirement Calculator.
The AARP Retirement Roadmap
Start by using the AARP Retirement Roadmap at www.aarp.org/finance to figure out what you want in retirement. The results can help you think about the options available to you, and set your retirement priorities.
The Roadmap asks you 12 questions about your desired lifestyle, personal priorities and general financial status. It reflects the many ideas people have about their retirement and may help you come up with some of your own. Some people dream of leaving work behind to spend more time pursuing a hobby, volunteering in the community, or traveling. Others dream of starting their own business or embarking on a new career. Some people are in excellent health and don’t expect to spend much retirement income on medical care. Others realize that they will have ongoing medical expenses, and may need to budget for insurance to help with the bills.
Answering the questions about these types of issues will help you start to “see” your retirement, and the results will give you a sense of what it might take to get you there.
The AARP Retirement Planning Calculator
Once you have a better idea of the retirement lifestyle you want, you’ll need to figure out how much it will cost. You can estimate how much you need to save by using the AARP Retirement Planning Calculator at www.aarp.org/finance. The calculator contains three sections: an estimate of your retirement income needs, an estimate of the sources of money to fund your retirement, and your prospects and alternatives for meeting your income needs.
Retirement Income Needs
To come up with an estimate of your income needs, here are some things you need to do:
• Estimate how long your retirement will last. There’s no sure way to predict how long you’ll live. But you can make a good guess based on average life expectancy rates, your current health status, and how long your parents or grandparents lived. With this guess, go out on a limb. If you think you’ll live to 85 after taking these things into account, plan for enough money to support you at least to age 90. Don’t underestimate how long you think you will live—otherwise, you may not save enough to make your money last.
• Set a financial goal. Do you expect your retirement to cost you more, less, or about the same as life before retirement? Some expenses may go down a lot. You may have paid off your mortgage, commuting costs will go away if you stop working, you’ll stop contributing to retirement savings, and you’ll probably pay lower income taxes. Other expenses, for health care (Medicare by no means covers it all), traveling, or pursuing other interests, will probably go up.
The calculator asks you to set a goal as a percentage of your pre-retirement income. If you click on the “estimate” button for retirement income, you can come up with a figure by listing your expected retirement expenses for items such as housing, insurance and taxes. Most people need somewhere between 70% and 100% of their pre-retirement income to cover expenses when they stop working. So if you earn $30,000 and you think you’ll need 80% of that in retirement, your financial goal will be to have enough income to pay you $24,000 a year for each year in
retirement. (Check to make sure calculator includes inflation.)
Retirement Funding
This section of the calculator can help you identify all of your savings and other sources of retirement income, including retirement accounts such as a 401(k) or IRA, Social Security, real estate and investments. To figure out how much money you might actually have on your chosen retirement date, the calculator starts with your current savings and investments, then makes estimates based on your plans for future savings and investment returns.
Calculate Results
The last section of the calculator shows how close you can come to your retirement income goal, based on the choices and assumptions you made earlier about retirement spending needs, resources and investment returns. The easy-to-read colored charts as well as numbers make it very clear whether your current roadmap will lead you to your retirement goal.
If your chart shows you falling short of your goal, you can change some assumptions—such as the age you plan to retire or the amount you’ll save every month—to figure out how to create the path you need to take to arrive at your goal.
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