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Couple with two young children walking on the beach

Ah…retirement – those carefree, leisurely days of new adventures, cruise ships, overseas trips, volunteering, and socializing.  Just don’t forget the check book. If you’re like most Americans heading toward retirement, you may need to either ramp up your savings and reduce your expenses or temper your expectations.

About half of households age 55 and older have no retirement savings plan (such as an IRA or 401(k) plan), and 29 percent have neither a retirement savings plan nor a defined benefit plan (which typically provides a monthly payment for life), according to the Government Accountability Office (GAO) 2015 population study.1  (See chart below.)

select resources for all households

The GAO study also revealed that among those who do have some retirement savings, the median amount is about $104,000 for households age 55-64 and $148,000 for households age 65-74. That’s equivalent to an inflation-protected annuity of $310 and $649 per month respectively. About half of households age 65 and older rely on Social Security for most of their income.

A separate study, the Survey of Consumer Finances, conducted by the Federal Reserve Board in 2013, found that among households of individuals 65 to 74, 52% had no retirement savings and 27% had no defined benefit plan or retirement savings. (See charts below.)

household retirement savings

The low savings rate will make it challenging for most retirement age Americans to live comfortably, stay active, and keep enough in reserve to cover their assisted living and health care costs later in life – especially when factoring in the effects of inflation.

Let’s take a look at how much it’s going to cost you to live out your retirement dreams – both under today’s prices and the inflation-adjusted costs over the next three to four decades of your retirement life. For the sake of simplicity, the estimates assume the cost for one person in one household with one income.

An oft-repeated rule-of-thumb suggests that you will need about 80 to 90 percent of your current (working) income to cover your costs in retirement. You’ll no longer have certain work-related expenses, such as transportation and clothing, and you will no longer be contributing a share of your income to your retirement plan. You will, however, have more leisure time to fill, and, depending on how you plan to fill it, your living costs could actually increase.

Let’s break down your likely costs by category to present a hypothetical picture of the costs of living an active retirement lifestyle:

Step 1. Current costs

Home costs. Is your home paid for? That would help. But if you still have years to go to pay it off, add that to your budget. (Perhaps consider downsizing.) What’s your monthly cost of utilities, cable and internet, association fees, maintenance, insurance, taxes, and other costs? Very loosely, let’s estimate this at $1,000 to $5,000 per month (depending on the mortgage).

Other necessities. How much do you spend each month on food, health care, transportation and other necessities, such as gasoline and auto maintenance, car insurance and related expenses? Is your car paid off, or do you still have payments? What about health insurance (or Medicare supplemental and dental insurance)? How about life and long-term care insurance? Let’s estimate this at $1,000 to $2,000 per month.

Pleasures and past-times. Do you have other pleasures and past-times you hope to pursue in retirement, such as travel, dining out, entertainment and sporting events, health club membership, golf and other activities and hobbies? Let’s estimate this at $500 to $1,500 per month.

Children and grandchildren. Do you have children or grandchildren? You may want to help them with various educational expenses (or to pay off existing student debt). Decide how much you’d like to contribute to various expenses of your children and grandchildren and add that to your budget. Let’s estimate this at $0 to $1,000 a month.

Charitable giving. Would you like to donate to your favorite causes or place of worship? Include that in your monthly budget. Let’s estimate this at $0 to $1,500 a month.

Step 2. Future costs

Health care. While this expense is difficult to predict, depending on your health and fitness, there are pluses and minuses to medical care during retirement. The plus is that you’re eligible for Medicare for free once you reach 65. You are also required to buy a supplemental policy to cover many of the costs. That supplemental care may cost an individual about $100 to $200 a month.2 Between the two, most of your health care costs will probably be covered throughout your retirement. But that doesn’t always include dental. If you want to maintain a healthy smile, you may need to buy a separate insurance policy or pay for it out of our pocket. Teeth and gums become more of a concern later in life, and costs for many procedures can run into the hundreds or thousands of dollars.

Long-term care. About 70 percent of all Americans age 65 or older will likely need some form of long-term care, according to the Department of Health and Human Services3; 20 percent will need care for five or more years, and more than 40 percent will need care in a nursing home. While Medicare and supplementary policies will cover some of those costs, you would need to pay the cost of extended pay, out of your own pocket unless you have a separate long-term care insurance policy that covers extended care.

Here are senior care industry average costs for 2015 from the American Elder Care Research Organization4:

  • An in-home, non-medical aide costs $3,520 a month
  • Adult day care is $1,518
  • Assisted living costs $3,600 a month
  • Skilled nursing home costs $6,600 a month

Assisted living costs are normally not covered by traditional insurance policies. Let’s assume you have long-term care insurance to cover certain skilled nursing home costs, but will still need assisted living, which averages about $3,600 a month. Add to that any other expenses, such as groceries, clothing, insurance, charities, entertainment, children and grandchildren, and your total may be in the range of $4,000 to $5,000 per month.

Legacy. Would you like to leave some money for your heirs and your favorite charities? You might set a goal, but in the end, the depth of your generosity will depend largely on your ability to acquire a sufficient nest egg during your working years and manage it wisely throughout your retirement.

Step 3. Adding it all up

 The table below offers a summary of the hypothetical costs covered above:

how much will you need to retire data table

While your own situation may vary, based on this hypothetical summary,  from the time you retire, you would likely need $2,500 to $11,000 per month in the early stages and $4,000 to $5,000 later on. For the sake of simplicity, let’s conservatively say that you will spend $4,000 a month ($48,000 a year) during your retirement – based on today’s prices.

Step 4. Add in inflation

At an annual inflation rate of 3 percent, which is fairly close to the historic average,5 your costs would double after about 20 years. If you are 55 today, your cost of living would theoretically double by the time you’re 75 and double again by the time you’re 95.  That means that if you need $4,000 a month in today’s dollars, you’ll need $8,000 a month ($96,000 per year) in 20 years and $16,000 a month in 40 years ($192,000 a year).6

Step 5.  Consider other income sources

Now let’s say you have enough Social Security to cover half of your $48,000 annual costs. If you have a lifetime stream of income from a pension, annuity, or similar source, that would reduce your dependence on investment income still further.

While it is impossible to predict a future return on your investments, here’s a range of outcomes to consider:

A $1 million investment yielding 2% per year would return $20,000 (before taxes); 3% would yield $30,000; 4% percent would yield $40,000, and 5% would yield $50,000. However, unless the money is coming from a tax-exempt account, your actual income would be somewhat less after taxes.

A portfolio with a yield of 4% to 5% on a $1 million account would typically provide a before-tax income in the range of $40,000 to $50,000, which, combined with your Social Security income ($24,000 in this example), would leave you, hypothetically, with enough to cover your current expenses, income taxes and add to your principal to help compensate for inflation.

If, over the course of your retirement, you manage to live off your annual investment yield without tapping into your principal, your legacy would take care of itself. The balance left in your investment account (along with any other assets) would ultimately make up the bounty you leave behind for your heirs and favorite causes.

If you find these projections to be a wake-up call, you’re not alone. While your own situation may vary, about half of individuals 55-64 do not expect to have enough income in retirement to maintain their standard of living, according to the GAO report.

If you’re among that group, perhaps a sense of urgency could help you cut your expenses and focus more on your retirement savings. It may not be enough to cover all of your retirement goals, but it might help you join the 66 percent of households 65 to 74 who now say their retirement income is sufficient to maintain their standard of living.7

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This article is not intended as a source for legal, accounting or tax advice or services. Work with your attorney and/or tax professional for additional information.