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The Average Cost of Retirement
The Average Cost of Retirement
Many people wonder exactly how much it will cost for them to retire comfortably, and whether they’ll have enough money to do it. That can be a tough question to answer — but it’s an important one to get right. Learning about current retirees’ finances can be a helpful starting point when gauging your own retirement goals.
According to the Data …
The U.S. Census Bureau provides information regarding the typical retirement income of Americans. They do this by reporting two types of statistics — mean income and median income.
Mean income is determined by adding all the annual incomes of retirees and dividing by the total number of retirees. The resulting number is the arithmetic average. However, this value can be greatly influenced by extremely high- or low-income numbers.
The median is calculated by taking the middle value of all annual incomes of retirees when the values are arranged from low to high. Because a median isn’t influenced by those with very high or low incomes, it’s often regarded as more representative. In 2021, the median annual income of American retirees over the age of 65 was $47,357 — whereas the mean was $73,288.
Census Bureau data also reflects a downward trend in retirement income as retirees age.
From ages 65 to 69, the median household income was $60,324; from ages 70 to 74, it shrinks to $53,327. And among retirees over 75, the median income was $37,335. This is in part because as retirees age, they are less likely to be earning any income and are typically spending down savings and investments.
The census also breaks down data by state. Typical retirement income varies a great deal in terms of where retirees live. The highest reported income is in the District of Columbia ($43,601), and the lowest is found among Indiana residents ($20,521). Cost of living is a primary driver of retirement budget calculations including:
- Your lifestyle during retirement (travel, eating out).
- Housing costs.
- Health care expenses.
- The age you elect to start receiving Social Security benefits.
- Economic conditions, including inflation at the time you retire.
- Financial contributions from your spouse.
Where to Start?
One often-cited rule of thumb when it comes to retirement income planning is that many people are expected to need approximately 80% of their pre-retirement income to retire comfortably. That means if you made $100,000 per year pre-retirement, you’d need about $80,000 post-retirement. Thinking about why you’ll need less is that your income tax obligations are anticipated to be lower, and you won’t have to pay for many job-related expenses. However, it’s important to realize that other costs, especially those related to medical needs, can increase significantly during retirement.
The Number That Matters Most
Retirement planning is ultimately a very personal decision-making process that depends on your unique situation and needs. That’s why things like the 80% rule are best regarded as a starting point and not a hard and fast rule. Because so many factors go into retirement planning — projected taxes, inflation, cost-of-living increases and much more — it can be useful to seek the advice of a qualified financial professional to assist you. In the end, it’s not the average retirement that matters most — it’s your own.
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Where You Retire Matters!
Where You Retire Matters!
Many people dream of relocating
when they retire. While some spots are more popular for retirees, these areas
often come with higher costs of living. And because most retirees live on a
fixed income, it’s important to keep a close eye on costs. If you’re dead set
on retiring to a pricier area, you may even need to continue working for a few
years longer than you planned to make it happen. Here are things to consider
when evaluating your options.
Taxes
From state to state,
and even from town to town, the baseline taxes that residents must pay can vary
quite a bit. Some states, such as Florida, have no state-level income tax at
all. Others have either a flat tax rate — where the state taxes all income at
the same rate — or a progressive tax — in which those with higher incomes pay a
higher rate. But even if your state has no income tax, your town’s property
taxes may cut into your savings. It’s also important to assess the sales tax
rates in the area where you’re hoping to move, as these could also add up. Some
municipalities have local sales taxes as well, so be sure to do your research
to determine if an area is truly affordable for your retirement budget.
Housing Costs
Home prices and rental rates
have increased steadily for years, but this is especially true in places with
competitive real estate markets. It may be helpful to research future
development plans in your area. If a large company is planning to build or
expand a major facility nearby in a few years, for example, expect housing
costs to increase as new employees want to move closer to their jobs.
Insurance
Many of the most popular
retirement destinations — particularly along the coast — are also in areas that
are at particular risk of certain disasters. For instance, Florida’s hurricane
season lasts for several months every year, and residents sometimes face catastrophic
storm damage. Because of this, currently the average cost to insure a $250,000
home in Florida is $1,648 per year, compared to $681 per year in Delaware. Your
car insurance may be higher in certain states, too, which often depends on the
average number of uninsured drivers in the area and other factors.
Transportation
Unless you enjoy (and can
afford) frequent travel, it’s important to think about the proximity to the
places you’ll want or need to go often. Being far away from loved ones could
require you to spend a lot of your retirement income on visits, and if you’re
an outdoorsy person, living in a city means you’ll be planning — and paying for
— frequent getaways. But it’s not just leisure that could cost you. Living far from
grocery stores, doctors, pharmacies and other necessary places can add
significantly to your household budget, whether you drive yourself or take
public transportation.
State Benefits
Depending on where you live,
your Medicaid benefits could range from generous to very low, potentially
leaving you on the hook for expensive in-home or facility-based care. Medicare premiums
vary from state to state as well. If you’re able to self-fund your medical
care, this may not affect you as much. But if you need to rely on state
benefits, be sure to research the costs and coverage in the state where you
intend to retire.
Overall Cost of Living
The cost of everyday items such as groceries, clothing, home services and more can vary tremendously depending on whether you’re located in a big city or rural area. With so many factors to consider for retirement, using an online calculator to help project cost of living in areas you’re considering can be a useful starting point. However, it may also be helpful to speak to a financial professional to help you figure out what you can afford, and which area suits your budget best, so you can adjust your retirement plan accordingly.
Putting off 401(k) Enrollment Could Cost You More Than You Think
Putting off 401(k) Enrollment Could Cost You More Than You Think
You just landed a new job, and there are so many things to do. You have to set up your new workspace (even if it’s at home), become acquainted with your boss and coworkers and get up to speed on your new responsibilities. And there’s the company-sponsored 401(k) you should sign up for.
It could be tempting to put off investment- and retirement-planning decisions until you settle in. But that’s an idea that could cost you more than you might expect, especially if you have a longer time horizon to retirement.
According to The Motley Fool, a 25-year-old employee making about $47,000 who saves 15% of their income and realizes a 7% annual rate of return would have almost $100,000 more at retirement than another worker with all the same parameters — except that they waited until age 26 to begin their contributions.
So, move signing up for your 401(k) to the top of your to-do list. If the options are a little overwhelming, sit down with a financial advisor who can help you determine your personal risk tolerance and recommend investments accordingly.
Another option to consider if you’re unsure about making investment decisions is electing to contribute to a target date fund (TDF), if your plan offers one. These funds create a mix of investments according to an estimated retirement date.
The fund automatically adjusts the mix and risk of investments to become more conservative as the target date approaches. A TDF handles much of the decision making for you. However, it’s still important to monitor the fund’s performance and periodically check in with your financial advisor to ensure you remain on track to meet your retirement goals.
You generally want to contribute as much as you can to your 401(k) plan. But at minimum, try to contribute at least enough to earn the maximum company match.
Companies that offer a what’s called a 401(k) “match” will match your retirement contributions either dollar for dollar, up to a certain amount — or according to a percentage or formula. You always want to aim for contributing at least enough to receive the maximum possible employer match or you’re leaving free money on the table.
What you may intend to be a small delay in contributing to your 401(k) can lead to months or years as life gets busy. If this should happen, you can easily miss upswings in the market and opportunities for growth to compound over time.
Choose to make retirement planning a priority and put yourself first. Your employer-provided financial advisor can be a tremendous resource whether it’s the first time you enroll in a 401(k) plan or your third or fourth time around. And if this isn’t your first experience with a 401(k), be sure to discuss the options for any funds remaining in 401(k) accounts from your previous employers as well.
Don’t delay this important decision — set up an appointment with your financial advisor today.
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