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The answer depends upon what you have in mind for retirement. Do you envision luxuriating in relaxing endeavors such as painting by the sea, caring for your garden, taking your grandchildren to the park? Or, do you dream of a retirement full of activity, frequent fine dining, world traveling, and social activities? Perhaps a bit of both? Imagining your retirement and then estimating the amount of money you will need to fund such a retirement is a good beginning. Use our Retirement Planning Calculator to help determine if you're saving enough.
Increasing and Decreasing Expenses
When estimating the necessary savings to pursue your retirement dreams, it's important to also consider the expenses that will likely increase during retirement such as health insurance premiums, prescription medicines, and travel. Some of those increases may be offset by expenses that will likely decrease such as work-related expenses, educational costs, and entertainment spending.
Assumptions and The Unexpected
Making realistic assumptions for projected earnings growth and inflation rates are paramount to the planning process. In the late 90's, an assumed growth rate of 12% seemed reasonable. Not today. And inflation rates have been extremely low during the past few years, but don't count on that continuing in the future. Using a timeframe of 15 to 30 years when analyzing historical trends may help you in establishing a realistic rate assumption for inflation and earnings growth. During the past 30 years inflation has average between 4 and 5%.
It is also important to prepare for those often-overlooked and unexpected costly situations that can derail your savings plans. A few examples include illness, temporary loss of income, and caring for elderly parents.
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