It’s essential that you know how much you need to save before you seriously consider retirement.
Obviously, the earlier you budget for retirement, the earlier you can pivot and change course if needed. Life happens fast. You need to be ready for it.
1. Even though you’re saving now, you may realize you need to start saving more once you take inflation into account.
2. Should you consider downsizing so you can put more towards retirement right now?
3. As you age, your entertainment budget will equalize with your health budget, and by the end healthcare will have overtaken entertainment almost completely.
Here are three reasons you need to start now so that you can be truly prepared when the time comes.
Prepare for inflation
Just as 25¢ isn’t as powerful as it used to be, neither will $20 be in the not-so-distant future.
Even though you’re saving now, you may realize you need to start saving more once you take inflation into account. Luckily, there are such things as inflation calculators you can use online to gauge what your future purchasing power is going to look like in the years ahead.
Inflation calculators ask such questions as your current age, gross annual income, retirement age, life expectancy, percentage of income at retirement, as well as expected inflation rate. Answer the questions, and it will tell you how much it will cost to enjoy the same standard of living you have now.
Note: In the past ten years, the highest inflation has risen is 3.2%, but it’s normally stayed between 1.5 and 2.5% (the average is just 1.6% year to year). We recommend entering 3% just to be safe.
Know if or when you need to downsize
If you have a mortgage, when is the mortgage expected to be paid off? Will it be paid off by the time you retire?
Are you renting? How much does rent increase each year?
You’re likely only going to make a percentage of what you earn right now when you retire. How much of your expected monthly income is going to be spent on housing? Should you consider downsizing so you can put more towards retirement right now?
Even if your mortgage will be paid off by the time you retire, ask yourself how much you spend on maintenance every year? For most people, it’s 1% to 3% of its current value. Is that something you want to commit to in the future? Or do you think you’ll want something that requires less maintenance on your part? Future you may one day wish you had saved your money for things that truly bring you joy.
Plan for what you need and what you want
During early retirement, you may want to travel and do more with your money. As you age, your entertainment budget will equalize with your health budget, and by the end healthcare will have overtaken entertainment almost completely.
It’s important to factor entertainment and travel into the mix so you get everything you want out of retirement, but it’s obviously equally important to factor in unwanted expenses such as standard and emergency healthcare.
You want a good war chest devoted to both.
According to a report by the National Bureau of Economic Research, people who turned 70 in 1992 have spent anywhere between $122,000 to $600,000 on healthcare costs.
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