The lifestyle you want to lead in retirement also impacts how much income you will need. Travel, entertainment and golf don’t come cheap. But perhaps you have modest dreams and will consider downsizing during retirement. Think about whether you will have multiple cars or a big home, how much you might travel, etc. Having a plan for what you think you will do in retirement will help you determine the true income level you may need.
Health Care
While few of us like to think about it, the truth is that you will need more health care as you age. And health care costs are rising much faster than inflation. Medicare and Medicaid do not cover everything, and even if you are healthy, prescriptions alone can be quite costly. Currently, the average 65-year-old retiring couple is estimated to spend $240,000 on health care throughout their retirement.1 Of course, that means many couples spend less and many spend more.
Inflation
Don’t forget to factor in inflation. In general, the price of goods increases about 3%-4% each year, so all things being equal, that $1.00 cup of coffee will cost $1.04 next year. Of course, all things are rarely equal, and the price of many things (such as health care and college) increases much faster than the cost of inflation. The bottom line is that you need your investments to return at least 4% just to keep up with inflation. That can be a tall order.
Don’t get discouraged
The information can seem overwhelming, but it doesn’t need to be. Every little bit you save will help you prepare for retirement, so do not get discouraged. One thought is to save as much as you can now and to select investments, such as exchange-traded funds (ETFs), that offer lower fees. Even 1% lower fees can make a significant difference in your retirement balance over time.
This post was republished with permission from the WisdomTree blog.