Retirement Planning: How Much Do You Need in Savings?

• 1. Longevity

  The current life expectancy of a 65-year-old in the United States is 19.1 years, according to the CDC. That means that if you retire at 65, you’ll need to plan to live off your savings for at least 19 years. And that’s just the average. What if you live longer? A good retirement plan will include strategies to make your money last in case you live a very long life (let’s hope that’s the case!).

• 2. Market volatility

  Investments are an important part of a retirement plan because they help you keep up with inflation over time. But we all know that while the market has its ups, it also has its downs. That’s why you’ll want more than just investments when you get to retirement. You’ll lean on those funds that aren’t tied to the markets during a downturn, allowing you to avoid selling investments at a time when they have lost value.

• 3. Inflation and taxes

  After years of low inflation, it came roaring back in 2022 and 2023. It’s a reminder that your nest egg can lose purchasing power as the years go on. Keeping a portion of your retirement funds invested can help you keep up with inflation over time.

  Meanwhile, your tax liability in retirement can also cut into your savings. If you have tax-deferred accounts, such as a 401(k) or traditional IRA, the distributions you take in retirement will be taxed. Depending on the size of your withdrawals, it could even push you into a higher tax bracket. Fortunately, there are ways to minimize your tax burden to help your retirement savings go further.

• 4. Health care

  Accounting for health care costs is a critical part of your retirement planning, as these expenses increase every year — one major health issue could eat away at your carefully constructed nest egg. The minimum age to enroll in Medicare is 65. (Folks who plan on retiring before then will likely need to prepare for higher health care costs.) Even when you qualify for Medicare, it’s important to remember that you’ll still have deductibles and out-of-pocket costs to consider. For example, dental, vision and hearing are currently excluded. There’s also a premium for Medicare Part B, which covers outpatient care and doctors’ services. This could set you back anywhere from $164.90 to $560.50 per month, depending on your income.

• 5. Long-term care

  Long-term care isn’t typically covered by health insurance. Medicare also has restrictions that may not cover the costs if you or your spouse develop a prolonged illness that requires special care. Proper planning can help you avoid draining your retirement savings or creating a financial burden for your loved ones.

• 6. Legacy

  If retirement seems far off, a legacy is probably in the stratosphere. But it’s something a good retirement plan will account for. Why? Because many people eventually decide they want to leave a legacy. Perhaps it will be money for your children, grandchildren or even a favorite charity. Knowing how you’ll leave your legacy can free you to spend the rest of your savings without worrying about what you’ll leave behind.

• Social Security: If you or your spouse spent a career paying taxes, Social Security — which pays a monthly benefit that’s unaffected by the markets and will continue for as long as you live — can serve as the base of your retirement plan. Your benefit amount will depend on when you begin collecting Social Security. While you’re eligible to start getting distributions at 62, your monthly benefit will be reduced if you claim before your full retirement age (FRA) — age 67 for those born in 1960 or later; and if you wait to take your benefit, it will increase by 8 percent every year from your FRA until you turn 70.

• IRAs and 401(k)s: Traditional IRAs and 401(k)s are retirement savings accounts that you fund with pretax dollars, so your contributions are tax-deductible. You’ll benefit from tax-deferred growth until you’re ready to begin taking distributions, which will be taxed. Roth IRAs and Roth 401(k)s are different in that they’re funded with after-tax contributions, and your withdrawals will generally be tax-free. These investments can help you grow your funds over time while also helping you to manage what you owe in taxes.

• Taxable investment accounts: You can deposit funds into a taxable investment account. While these accounts don’t offer the same tax advantages as retirement accounts, there’s no limit to the contributions you can make to traditional investment accounts. These can help you grow your money over time.

• Pensions and annuities: Pensions are rare but valuable, providing a guaranteed monthly payout (usually for life). If you don’t have a pension but are interested in additional guaranteed income in retirement, you may want to consider an income annuity. With an income annuity, you receive fixed monthly payments throughout retirement — typically for the rest of your life. This can protect your retirement income in the event that you live for a longer than expected time.

• Health savings accounts: Available to those with a high-deductible health plan, you fund HSAs with tax-deductible contributions that you can use to cover certain medical expenses. They allow for tax-free growth — and you won’t be taxed on qualified withdrawals. Another upside is that once you turn 65, you can use HSA funds for anything you like (those distributions will be taxed as ordinary income). HSA funds can help you manage taxes and health care expenses in retirement.

• Life insurance: Life insurance may not seem like something that would be an option for retirement. But permanent life insurance can help your retirement. Because its death benefit never expires, permanent life insurance can be part of your legacy planning. This type of insurance also accumulates cash value, which typically isn’t affected by the markets. The cash value of permanent life insurance can be a source of funds to help get you through market downturns*.

Life events that could impact your retirement plan

• Getting married 

• Having children

• Getting divorced

• Experiencing a job loss or changing careers

• Experiencing medical challenges

• Changing your retirement vision

• Receiving an inheritance or other windfall

• Take advantage of 401(k) and IRA catch-up contributions: In 2021, you can kick in up to $19,500 to your 401(k) and $6,000 across all your IRAs — but those who are 50 and over can save even more. Folks in this camp can contribute an extra $6,500 to their 401(k) and an extra $1,000 across all their IRA accounts.

• Opt to stay in the workforce longer: Retirement planning is often full of trade-offs. Staying in the workforce a little longer may be all it takes to bring your retirement vision to life. Alternatively, you could continue working part time or assume a temporary consulting role to cushion your savings.

• Leverage cash windfalls: Whether it’s a tax refund or a work bonus, putting extra income into your retirement accounts can help grow your nest egg during your working years.

• Delay Social Security: As mentioned earlier, the longer you delay Social Security, the larger your monthly benefit. The idea is to wait until at least your full retirement age, which is age 67 for those born in 1960 or later. At that point, your benefit will increase by 8 percent every year until you turn 70.   

• How much do I need for retirement?

• I only have a 401(k). What other retirement savings plans are best for me?

• How do annuities work?

• When should I claim Social Security?

• How can I manage taxes to maximize income?

• How will I pay for medical costs?