- Written By Thomas J. Brock, CFA®, CPA
Thomas J. Brock, CFA®, CPA
Investment, Corporate Finance and Accounting Expert
Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.Read More
- Edited By Michael Santiago
- Published: July 18, 2023
- 4 min read time
- This page features 2 Cited Research Articles
Retirement planning has become increasingly complex in recent years, and the notion that $1 million is enough to sustain a comfortable retirement is being challenged. With rising living costs, increasing healthcare expenses and longer life expectancies, it’s important to reevaluate retirement savings goals.
The 75% to 85% Rule-of-Thumb
Traditionally, financial advisors recommend aiming for a retirement income of 75% to 85% of pre-tax earnings in the last working year. This rule-of-thumb takes several factors into account, such as consistent annual savings of around 15% of earnings, a balanced budget during retirement and lower tax obligations. However, as the economic landscape and cost of living continue to evolve, it’s important to reassess this guideline.
Factors Influencing Retirement Income
When planning for retirement, it is important to consider various factors that can significantly influence your income during your golden years. Three key factors that have a substantial impact on retirement income are life expectancy, healthcare costs and retirement lifestyle and geographic location. Recognizing the essential role played by each of these factors in retirement can assist you in planning for the future.
Life expectancy has been steadily increasing over the years, with many individuals now living well into their 80s and 90s. While this is undoubtedly a positive development, it also means that people are spending a more extended period in retirement. A longer lifespan requires careful financial planning to ensure that there are enough savings to sustain a comfortable lifestyle throughout retirement. With more years to cover, individuals need to consider not only their immediate financial needs but also potential future expenses, such as healthcare and long-term care.
One of the most significant concerns for retirees is the rising cost of healthcare. Medical expenses have consistently outpaced inflation rates, and as individuals age, their healthcare needs often increase. These escalating costs can significantly impact retirement budgets and erode savings if not prudently anticipated. It is essential for you to factor in potential healthcare expenses when planning for retirement and consider options like long-term care insurance or health savings accounts to mitigate these costs. By proactively addressing healthcare expenses, you can better protect your retirement nest egg and maintain financial security.
Retirement Lifestyle and Geographic Location
Retirement is a time to enjoy the fruits of your labor and pursue personal passions and interests. However, the desired retirement lifestyle and geographic location can have a significant impact on financial requirements. You may choose to lead an active and adventurous retirement, involving travel, engaging in hobbies or pursuing new experiences. On the other hand, you may prefer a more relaxed and frugal retirement lifestyle. Additionally, the cost of living can vary significantly depending on the geographic location chosen for retirement. Higher-cost areas may require more substantial savings to maintain a desired standard of living. Considering individual retirement lifestyle preferences and the associated costs is important for setting realistic savings goals.
Rethinking Retirement Savings
Given the aforementioned factors, a one-size-fits-all approach to retirement savings is insufficient. It is recommended that you consider your unique circumstances when determining your retirement savings goals. Taking these factors into account can help you proactively mitigate any unexpected events that might jeopardize your plans or disrupt your retirement income, enabling you to navigate your golden years with increased peace of mind.
Evaluating Future Circumstances
To gain a clearer understanding of what a suitable retirement income may look like, it is important to evaluate future circumstances thoroughly. This involves considering factors such as life expectancy, healthcare costs, retirement lifestyle preferences and geographic location. By assessing these variables, individuals can develop a more accurate savings target. Evaluating these circumstances provides you with the opportunity to mitigate complications and plan effectively.
Financial advisors specializing in retirement planning can provide valuable insights tailored to individual needs. They can help individuals navigate the complexities of retirement savings, considering factors such as inflation, investment returns and projected expenses. Seeking professional guidance can ensure a more comprehensive and personalized retirement plan.
The Importance of Personalized Retirement Savings Goals
In conclusion, the belief that $1 million is sufficient for retirement is no longer universally valid. As life expectancies increase, healthcare costs rise and retirement lifestyles vary, it is vital to reevaluate retirement savings goals. By considering your unique circumstances, seeking professional advice and accounting for a range of factors, you can better determine the amount you need to save for a secure and comfortable retirement.