If you’re in your 50s or early 60s, your much-anticipated retirement day may be approaching soon. This makes now a critical time to make sure you’ll have enough money to live comfortably in retirement.
So how do you measure up from a retirement savings standpoint? According to the Economic Policy Institute, the average retirement savings balance is $124,831 for households between ages 50 and 55 and $163,577 for households between ages 56 and 61.
Pump Up Your Retirement Savings
If your retirement account isn’t as healthy as you hoped it would be at this stage of your life, don’t panic. There’s still time to sock away substantial savings before your planned retirement date.
The good news is that you may be at a stage in life where you can really pump up your retirement savings. For example, you might be at your peak earnings capacity, and your children may have left the nest and graduated from college. This could leave you with more money that you can devote to retirement savings.
Consider Bob, a 56 year old who has a retirement account balance of $160,000, which is just about in line with the national average. Bob’s goal is to retire at 65 years of age and he’s planning to contribute the maximum amount allowed by law to his 401(k) between now and then, which is currently $25,000 a year (including catch-up contributions).
Assuming an annual return of 6%, Bob’s retirement account will have grown to more than $635,000 in 10 years. Even if he can only contribute half this much to his 401(k), his account balance will grow to nearly $461,000.
Calculate Your Retirement Living Expenses
Now is also a good time to plan and calculate your estimated living expenses in retirement. Start by writing down all of your current monthly expenses. Then you can make adjustments based on changes in your lifestyle after you retire.
For example, you can eliminate work-related expenses from your retirement budget like transportation to and from your office, work clothing and eating out for lunch. But you might want to add expenses for things like travel, recreation and hobbies if you plan to spend time in retirement pursuing these interests.
Your biggest expense is likely your home mortgage. Therefore, now is a good time to think about whether you should devote extra money each month to paying your mortgage early. The benefit of doing so is that paying off your mortgage before you retire would eliminate one of if not your biggest expenses from your retirement budget.
But keep in mind that every dollar you devote to mortgage pre-payment is a dollar that isn’t going into your retirement account. So think about which holds more value for you: Owning your home free and clear when you retire or having a bigger retirement nest egg.
Plan for Healthcare Expenses in Retirement
One major retirement expense that people sometimes forget to plan for is healthcare costs. Some near-retirees think that Medicare will cover most or all of their retiree healthcare expenses, but this isn’t necessarily true. There are monthly Medicare premiums, copays, coinsurance and annual deductibles, so out-of-pocket healthcare expenses can add up in retirement.
In fact, the average 65-year-old couple will need about $270,000 devoted just to healthcare expenses in order to have a 90 percent chance of paying for their healthcare in retirement. This is over and above what’s covered by Medicare and Medicaid, and it doesn’t include long-term care expenses.
You could decide to purchase long-term care (LTC) insurance to help pay for these expenses later in life. But LTC costs have been on the rise over the past decade, with the average 60-year-old couple now paying between $2,600 and $5,600 a year in premiums. One option is to purchase a combination LTC and life insurance or annuity product.
Another strategy is to start devoting some of your retirement savings to a Health Savings Account (HSA). There’s no “use it or lose it” with HSAs — funds that you don’t use in any given year roll over to subsequent years. So you could build up a separate healthcare nest egg to help pay for these expenses after you retire.
Make a Practice Run
As you inch ever-closer to retirement, consider taking a full year to live on your projected retirement budget. This will give you a good idea of how realistic your projections are and allow you to make adjustments to the reality of your situation, if necessary.
You might even determine that you need to delay your retirement for a little while in order to boost your retirement savings some more. While this might not be what you were hoping for, it’s better to learn this before you retire than after.
Please contact us if you have more questions about getting ready for retirement.