By Due. Originally published at ValueWalk.
To retire comfortably, Americans say they will need $1.1 million. Unfortunately, less than one in four will have the savings to do so.
According to the 2022 Schroders US Retirement Survey, 22% of people approaching retirement say they’ll have enough money to maintain a comfortable standard of living. The figure is down from 26% the previous year.
Overall, there is a general expectation among Americans that their retirement savings will be inadequate. In fact, the majority (56%) expect to have less than $500,000 saved by the time they retire and 36% anticipate having less than $250,000.
Not surprisingly, American workers were most worried about inflation shrinking their assets in retirement. The second most-feared scenario is becoming a reality, at least right now – 53% of respondents fear “a major market downturn significantly reducing assets.”
“The list of concerns that retirees have, and that Americans in general have, are longer and they are more serious today,” Joel Schiffman, who oversees defined contribution products in North America for Schroders, told Bloomberg. “Inflation, the stock market, the cost of healthcare, taxes — there is this compounding effect.”
People already retired said they were comfortable, or that their circumstances were “not terrible, not good.” But 18% said their retirement was hard, and 5% said it was an absolute nightmare.
Among respondents, a quarter said that in order to afford their “dream retirement” they must sacrifice what they want today; another 25% just need to keep on keeping on. The study revealed that 35% of respondents between the ages of 60 and 67 said they would have to win the lottery to achieve their dreams.
Before panicking, though, you should answer an important question. What is a comfortable retirement lifestyle?
What is a Comfortable Lifestyle in Retirement?
Your mileage will certainly vary. However, “Comfortable Retirees were more likely to have intermediate levels of financial assets (between $99,000 and $320,000) and income,” reports the Employee Benefit Research Institute (EBRI).
ERBI also found that;
- One in two homeowners were mortgage-free, while 37 percent had a mortgage.
- A third had no debt, while 42 percent had debt that was easily manageable.
- They were most likely married and had college degrees.
- More than half said they plan to grow, maintain, or spend a small portion of their financial assets, and almost three-quarters said their retirement savings are sufficient or above their needs.
“In this group, more retirees cited workplace retirement savings plans such as 401(k) plans and individual retirement accounts (IRAs), in addition to Social Security, as their major source of income than any other group,” they add. The most common types of debt are credit card and auto loan debt, and 1 in 3 had at least one of each.
“Half of the retirees in this group spend less than $3,000 a month, while the majority said they can afford their current level of spending,” states ERBI. “In this group of retirees, most think their standards of living have not changed since their working years; however, 1 in 4 believes it has declined.”
Retired Comfortables were on average just behind Affluent Retirees in their level of happiness during retirement.
Choosing a Comfortable Retirement Lifestyle
Before getting too consumed with an exact dollar amount, a key question to ask when planning for retirement is, “What do I want to do when I retire?” After all, putting money away for retirement without determining how you plan to make use of it can leave you unprepared for your golden years.
In terms of retirement, men are looking at over 18 years and women at over 20 years, as per the Social Security Administration. As such, it will be important to make sure you’re happy with how you spend that much time. If you’re stuck, you should take into account the things in life that are important to you. Examples include friends and family, socializing, travel, hobbies, etc.
To get started, answer the following questions. When you do, you should be able to figure out what your priorities for retirement are.
- Are there health concerns that will impact your retirement lifestyle?
- To what extent is the quality of health care where you live important to you?
- Are you planning to stay in your current residence?
- Would you like to live near your family or friends?
- Are you interested in moving to another state?
- Do you think living somewhere with lower taxes is important?
- Is it your dream to retire abroad?
- Would you like to move into a retirement community?
- When you get older, do you plan on moving into assisted living?
- During retirement, what kinds of activities do you want to pursue that you are passionate about?
- Are you interested in traveling?
- Is it important to you to participate in charitable activities?
- How much income will you need in retirement?
- Would you like to remain in the workforce? Full-time or part-time?
- In retirement, are you interested in reinventing your life?
When you figure out what your priorities are, you’ll get a better idea of what you should include in your retirement plan. And, more importantly what it will take to maintain a comfortable lifestyle in retirement.
It’s Not About Money, It’s About Income
When figuring out your retirement “number,” it’s important to take into account that it isn’t just about deciding how much you need to save,” explains Robin Hartill, CFP®. Americans, for example, tend to want to retire with a million-dollar nest egg. That, however, is a false assumption.
“The most important factor in determining how much you need to retire is whether you’ll have enough money to create the income you need to support your desired quality of life after you retire,” adds Hartill. Is a $1 million savings account enough to sustain an individual forever? Possibly.
So, how much income do you really need? Well, for most retirees, it’s definitely not 100% of your pre-retirement income. The reason? These expenses are probably not an issue;
- There’ll be no need to save for retirement.
- If you don’t commute to work, you might spend less on transportation costs.
- By the time you retire, your mortgage may be paid off.
- If you do not have dependents, you may not need life insurance.
“But retiring on 80% of your annual income isn’t perfect for everyone,” says Hartill. Depending on the type of retirement lifestyle you intend to have and the range of expenses you expect, you might need to adjust your goal.
It may make sense to aim for 90% to 100% of your pre-retirement income if you plan to travel frequently in retirement.
Alternatively, you may be able to comfortably live on less than 80% if you intend to pay off your mortgage before retiring or downsizing your living arrangements.
“Let’s say you consider yourself the typical retiree,” she says. Your annual income is $120,000 between you and your spouse. Using the 80% rule, you can expect to need about $96,000 in annual income after retiring, or $8,000 a month.
The good news? If you’re like most people, your Social Security benefits may provide some additional help beyond your savings. In fact, at the end of 2020, nearly nine in ten seniors were receiving Social Security benefits. Moreover, Social Security benefits make up about 30% of an elderly person’s income.
However, Social Security typically replaces a lower percentage of income for higher-income retirees. “For example, Fidelity estimates that someone earning $50,000 a year can expect Social Security to replace 35% of their income,” clarifies Hartill. On the other hand, if someone earned $300,000 a year, their Social Security income replacement rate would be only 11%.
As a rule, you can expect to receive less than half your pre-retirement salary in Social Security benefits. Therefore, you will be responsible for covering the difference.
But, there are still ways for you to still live comfortable off just a social security check:
- Delay taking your benefits. Try to wait until after you have reached your full retirement age before starting to collect benefits. Your Social Security benefits will be at their maximum if you wait until you are 70 years old. And, if you already filed, you can still withdraw your claim.
- Pay off your debt. Before retiring, it is best to pay off all debts, including credit card bills and mortgages, so you can maximize your Social Security benefits. So, instead of spending your benefits on things you have already bought, you can put them towards things you need today.
- Relocate. By lowering your cost of living, you can reap greater Social Security benefits. If you can consider moving to a tax-friendly state. Alaska and New Hampshire do not levy sales or income taxes, while Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do levy sales taxes, but do not levy income taxes or taxes on pensions.
- Don’t overpay for prescriptions. Medications can get rather expensive. Always choose generic over brand-name prescriptions when you can. Additionally, you may want to join a prescription drug membership program at the pharmacy where you buy your medication so that you can earn rewards and receive discounts.
- Take advantage of discounts. Speaking of discounts, if you go out to eat only go to restaurants the offer senior discounts. Also, the same it true with retailers like Kohl’s.
Consider Savings, Annuities, and Other Income Streams
While it’s possible to live comfortably just off Social Security, I wouldn’t completely bank on that. As a general rule, Social Security will only replace around 40% of your pre-retirement income. And, if you’re using the 80% rule as a benchmark, then that’s only half of your retirement income.
To make sure they are able to meet their bills and have a life in retirement, most people need additional income retirement streams. And, these income streams are typically;
Qualified retirement savings plans.
A 401(k) plan, an IRA, or another type of retirement plan are the most common in the private sector. Throughout your working career, you invest money into the plan. If you contribute to a retirement plan or take money out after you retire, you typically get a tax break. If you’re self-employed, you can contribute to a Simplified Employee Pension (SEP-IRA) or an Individual 401(k).
In addition to a qualified retirement, you should also have a diversified retirement portfolio. Generally, this consists of stock, high yielding bonds, high yield savings accounts, and dividend paying stocks.
An annuity is a contract that you purchase from an insurance or annuity company. It can provide a steady and guaranteed stream of income in retirement.
Private pension plans have become rarer over time. Government workers, who still have pensions, can rely on them as a regular source of income throughout their lives.
Veterans pension benefits.
Veterans Pension benefits may be available if you meet certain criteria, including serving during wartime, being 65 or older, having a service-connected disability, and little to no income. It differs from your military retirement pension, which is based on your number of years of service.
Moreover, you may want to consider working part-time. Besides the additional income, it can help make the transition into retirement smoother. And, it’s a surefire way to remain physically and mentally sharp.
Some suggestions would be freelancing, consulting, or babysitting your grandkids. You could also enter the gig economy by driving for Lyft or Door Dash. And, you could even rent out a spare bedroom to a full-time roommate or list it on Airbnb.
To learn more about the tax implications of retirement savings or collecting Social Security benefits during retirement, speak with your licensed financial advisor. Your finances may be affected.
Senior Living Options
The cost of housing will likely be your largest retirement expense. Housing-related costs averaged $1,406.68 per month for Americans 65 and older between 2016 and 2020.
The good news is that there are a number of ways to lower your monthly housing costs as well. When you pay your mortgage off, you won’t have a large monthly expense. Instead, you would only have to pay taxes, insurance, and maintenance.
Another choice would be to downsize to a home that costs much less and take advantage of the equity in your home. You can also save money on heating, cooling, maintenance, and taxes if you live in a smaller home in a cheaper neighborhood.
From what activities you can pursue to who you will socialize with to how much your new lifestyle will cost, where you live can make a big difference in your retirement lifestyle. With that in mind, here are some options worth exploring.
Move to a more affordable state.
Make sure you consider factors like taxes, cost of living, health care, and other quality of life issues before deciding where to retire within the United States. However, based on median home cost, medicare advantage cost, and the cost of living index, here are the 12 cheapest states to retire:
- West Virginia
- South Carolina
- New Mexico
55+ retirement communities.
Age-restricted retirement communities commonly offer detached houses as well as townhouses or apartments for active older adults. The community may have golf courses, organized activities, social calendars, and other conveniences.
Senior living apartments.
Older Americans can benefit from age-restricted apartments, condos or townhouses, which are specifically suited to their needs. The majority of them offer pools and fitness centers. On the other hand, medical or dining facilities aren’t usually available. The equity in your home can be released when you move into an assisted living complex for travel or other retirement activities.
Approximately 432,000 retired Americans were receiving Social Security benefits in foreign countries at the end of 2019, according to the Social Security Administration. Many countries offer retirement benefits for Americans while stretching their retirement dollars, such as;
- Puerto Plata, Dominican Republic
- Chitre, Panama
- Northern Belize
- Thailand’s Eastern Seaboard
- Popoli, Italy
- George Town Malaysia
- Cuenca, Ecuador
The secret? Finding a good balance between finances, a place you will enjoy living, and understanding the issues of becoming an expat, from health care to tax issues. Also, in a foreign country, Medicare typically doesn’t cover your health care, so you’ll still need to pay income taxes in the states.
Retirement Hobbies and Activities
When you retire, you should be able to focus on what makes you happy and what makes you feel fulfilled. However, you can still pursue hobbies and activities that meet both of these goals while living within your means.
Here are some of the best hobbies and activities you can enjoy throughout your golden years.
In retirement, you can pursue hobbies that interest you and have time to devote to them, such as knitting and photography. Also, here’s your chance to start a blog or write a book about something that interests you – without having to worry about going back to work every day.
Retirement is a great time to explore national and state parks or your favorite fishing hole during a weekday and avoid the weekend crowds. Even better? Most parks offer senior discounts.
Health and fitness.
Golf courses are commonly found in retirement communities. There are dozens of healthy lifestyle choices to pursue after retirement, including running, swimming, biking, and dozens of other activities. Physical activity is important for long-term health. Adults 65 and older are recommended to get at least two and a half hours of moderate – or 75 to 150 minutes of vigorous – physical activity every week.
Traveling around the world may be limited only by your budget since you do not have a limited number of vacation days. It may be affordable to spread out an RV adventure across the country over several weeks. But, the cost of intercontinental travel can be reduced with flexible travel dates and group tour packages. And, with four-day packages that offer affordable options, cruises provide action-packed adventures at sea.
An estimated 42% of retirees volunteer in their communities, according to AARP and Independent Sector, an organization that partners with nonprofits and foundations. Volunteering is a great way to stay active, meet new people, and make a difference in your community while feeling fulfilled.
Continue your education.
By taking classes at your local university or community college, you can keep your mind active in retirement. Studying a subject you were always curious about but never had time to investigate is a great idea when you are retired. Senior citizens have access to reduced tuition rates at many colleges and universities. Some may even be free.
Frequently Asked Questions about Your Lifestyle in Retirement
1. How much will I spend in retirement?
That depends as everyone’s situation is different. But, the 80% rule can provide a guideline.
Based on your current income, you can start the planning process by assuming you’ll spend about 80% of the income you will make before you retire each year. This ratio is called the retirement income replacement ratio. You can expect to spend about $36,000 a year in retirement, for example, if your preretirement income was $45,000.
Think of 80% as a good starting point. You can modify this number based on your lifestyle, health expectations, and income.
2. Where does retirement income come from?
The majority of retirees have multiple sources of income during their retirement years. Investment accounts that provide inflation protection, governmental benefits, or continuing paychecks are some examples. To ensure you have enough income to live comfortably, it’s best to have multiple income sources.
When deciding where your retirement income will come from, diversification is an important aspect to consider. As a result, your future income can be protected and market risks can be reduced.
3. How long will I live?
According to the CDC, the average life expectancy in the United States is 77 years.
4. What will my taxes look like in retirement?
Your retirement planner can provide you with an estimate of your tax rate in retirement if you ask this question. There are certain retirement savings, for example IRA and 401(k) accounts, that are taxable. You may also have to pay taxes on your Social Security benefits based on your income. You must also consider federal and state taxes.
5. Should I pay off my mortgage before I retire?
It all comes down to personal preference. Those who itemize deductions may find that their mortgage interest reduces their taxes. If the interest rate is low enough, you might be better off investing more money than paying off the debt.
If you plan on retiring comfortably, you need to consider the impact of paying off your mortgage. Even though it’s best to enter retirement debt-free, it’s not a good idea to drain your retirement fund to pay off a house.
Article by Deanna Ritchie, Due
About the Author
Deanna Ritchie is a financial editor at Due. She has a degree in English Literature. She has written 1000+ articles on getting out of debt and mastering your finances. She has edited over 40,000 articles in her life. She has a passion for helping writers inspire others through their words. Deanna has also been an editor at Entrepreneur Magazine and ReadWrite.
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