Retirement Strategy: How Much Should I Save?

"A simple fact that is hard to learn is that the time to save money is when you have some." - Joe Moore

"Will I outlive my money in retirement ?" This is one of the top fears of people who are beginning to prepare for their retirement years.

Determining how much money you need in retirement is a complex process and it should not be taken lightly. It also should not be a number that you just pull out of thin air.

The retirement planning process should include looking at your current financial situation and developing an approach based on your specific goals and time horizon. The process should take into consideration all your potential sources of retirement income, and should also project what your income would look like each year in retirement.

We all have our "blue sky" visions of the way retirement should be, yet our futures may unfold in ways we do not predict. So, as you think about your "second act," you may want to consider some life and financial factors that could suddenly appear.

You may see retirement as an extension of the present rather than the future.

This is only natural, as we all live in the present. But I can assure you that the future will arrive. The costs that you will incur later in retirement will exceed those at the start of retirement. As you could be retired for 20 or 30 years, the most prudent path is to take a long-term view of things.

You may have a health insurance gap.

If you retire before age 65, what do you do about health coverage? In most cases, Medicare will not be available to you until you are 65. In the meantime, you may need to shoulder 100% of the cost.

Suppose that you become disabled or seriously ill, and working is no longer an option. How will you make ends meet?

Age may catch up to you sooner rather than later.

You may stay fit, active, and mentally sharp for decades to come. But, if you become mentally or physically incapacitated, you will need to find people you can trust to manage your finances and other day-to-day affairs.

You could be alone one day.

As anyone who has ever lived alone realizes, a single person does not simply have expenses that are 50% of a couple's expenses. Maintaining a house or even a condo can be tough when you are elderly. Driving can also be a concern. If your spouse or partner is absent, will someone be available to help you in the future?

Here are some of the blind spots that can surprise us in retirement.

They may quickly affect our money and quality of life. If you age with an awareness of them, you will be better prepared to manage the outcome.

Your workplace retirement account can play a critical role in your overall retirement strategy. However, some people have not saved as diligently as others and may be surprised to find out that their savings are not sufficient to sustain their desired retirement lifestyle.

Much has been written about the classic financial mistakes that plague start-ups, family businesses, corporations, and charities. In addition to these blunders, there are also some classic financial missteps that plague retirees.

Calling them "mistakes" may be a bit harsh, as not all of them represent errors in judgment. However, whether they result from ignorance or fate, we need to be aware of them as we prepare for and enter retirement.

Timing Social Security.

As Social Security benefits rise about 8% for every year you delay receiving them, waiting a few years to apply for benefits can position you for higher, lifetime retirement income. Filing for your monthly benefits before you reach Social Security's Full Retirement Age (FRA) can mean permanently reducing your monthly benefits. You will be hard pressed to find another source of guaranteed, lifetime income that increases with inflation. Currently, Social Security is the only one that fits the bill.

Managing medical bills.

Medicare will not pay for everything. Unless there's a change in how the program works, you may have a number of out-of-pocket costs, including dental and vision care. It is important to plan for these costs too.

Underestimating longevity.

Actuaries at the Social Security Administration project that approximately a third of today's 65-year-olds will live to age 90, with about one in seven living 95 years or longer. The prospect of a 20- or 30-year retirement is not unreasonable, yet there is still a lingering cultural assumption that our retirements might mirror the relatively brief ones of our parents.

Withdrawal strategies.

You may have heard of the "4% rule". It is a guideline stating that you should take out only about 4% of your retirement savings annually. Some retirees try to abide by it, but others withdraw 7% or 8% per year. Why is this? In the first phase of retirement, people tend to live it up. More free time naturally inspires new ventures and adventures and an inclination to live a bit more lavishly.

Talking About Taxes.

It can be a good idea to have both taxable and tax-advantaged accounts in retirement. Assuming your retirement will be long, having taxable, tax-deferred (ie. IRA, 401(k), etc.), and tax-free (ie. Roth IRA) accounts will provide you with the most flexibility in your retirement income plan. Taxes will be one of your biggest enemies in retirement. Fortunately, proper planning can help you to minimize their impact in retirement.

Retiring with debt.

Some find it harder to preserve (or accumulate) wealth when they are handing portions of it to their creditors. The impact of servicing your debts in retirement must be planned for.

Putting college costs before retirement costs.

There is no "financial aid" program for retirement and there are no "retirement loans". Your children have their whole financial lives ahead of them. Therefore, your retirement plans must take priority.

Retiring without a plan.

You should expect that retirement will have more than a few surprises along the way. The absence of a retirement plan can leave you without guidance when those surprises occur.

These are just some of the classic retirement mistakes. To help avoid them, you should take the time necessary to review and refine your retirement plan with the help of a trusted financial professional.