Do I Have Enough Money To Retire? 5 Key Considerations  

Throughout our working lives, we focus on saving by contributing to our 401(k) accounts and growing our financial assets with discipline. But in retirement, that mindset shifts. Even though we begin to use these savings for their intended purpose, it’s normal to feel uneasy about the change.

This is why planning is fundamental. We use it to balance the short- and long-term with clients, to help provide the confidence they need to help get the most out of the early retirement years, without sacrificing financial security in later years. 

Five considerations to help ensure you’ll have enough money to retire 

1. Clarify your retirement goals

Start by envisioning your ideal retirement. Answering these questions can help determine how much money you’ll need for the lifestyle you want during your retirement years: 

• Do I want to live in one place year-round, or spend part of the year in another state? 
• What activities and experiences will define my ideal retirement lifestyle? 
• What are my retirement income streams? 
• Do I plan to leave a financial legacy? 
• What are my health risks? 
• What are my potential tax liabilities? 
• How will I cover healthcare costs? 
• Do I want to make any major purchases, like a second home? 

 2. Estimate your monthly income needs

At first, estimating your future expenses in retirement might feel overwhelming. That’s why I suggest beginning by closely tracking your existing spending habits. Include not just the essential costs, but also discretionary spending for the lifestyle you envision in retirement. Don’t overlook potential expenses including vacations, gifts, healthcare, long-term care, and emergencies. If you’re considering relocation to a warmer climate or to be closer to family or friends, account for the financial impact and the practical and emotional implications of the move. 

Estimating your monthly income needs should ideally start at least 12 months before your target retirement date. Here are some effective strategies I’ve used with clients that have helped boost their confidence as they approach this significant life transition: 

• Assess your current cash flow. We begin by looking at what’s landing in the client’s checking accounts. This net income is often a good estimate of their monthly living expenses. I also factor in any additional income sources they may be using. 
• Separate spending from income. A key step is breaking the habit of relying on a direct paycheck. I help clients transition to receiving funds from their brokerage accounts, this can allow them to get comfortable with this shift before retirement. 
• Bring the plan to life. Systems and escrow accounts are established for specific retirement goals, like travel or charitable giving, ensuring those plans stay on track. This process gives the retirement cash flow a “test run” ahead of time. By simulating how retirement income will flow, clients can gain the confidence they need to enjoy retirement without the stress that may come with such a major life change. 

3. Consider all income sources  

The amount of money you’ll need for retirement depends on your lifestyle, assets, and goals. Some financial professionals recommend aiming for 10-12 times your annual income by retirement age. However, factors like retirement expenses, healthcare costs, and potential moves to states with different tax structures can affect this estimate.  

Each year, we create a strategic 12-month plan that outlines when to draw income from various sources, such as Social Security, Roth IRAs, traditional IRAs, and pensions. Reviewing and updating this plan annually helps maximize tax efficiency throughout retirement. This approach combines a long-term strategy with short-term tactics to help optimize retirement income. 

Retirees typically draw income from a variety of sources, including Social Security benefits, pensions, traditional and/or Roth IRAs, 403(b) or 401(k) plans, and other savings or investments. However, with concerns about potential Social Security cuts, many wonder whether to claim benefits as early as age 62. While you can start then, you’ll receive reduced payments. On the other hand, delaying Social Security until age 70 could increase your benefits by up to 8% annually. 

At Mercer Advisors, we view Social Security as longevity insurance. Instead of maximizing the benefit early in retirement, we view it as a tool to help enhance income in the later years, when uncertainty is typically greatest. A higher fixed income during those final years can help provide valuable financial security. 

4. Boost your savings 

As you approach the runway to retirement, important decisions – such as when to claim Social Security, pension and deferred compensation choices, and Roth IRA conversions – are tremendously powerful and can help set the trajectory for a successful retirement. 

While there’s no exact figure to determine how much you’ll need in your retirement fund, some experts suggest dividing your desired annual income by 4%. For example, if you aim to have $100,000 per year in retirement, dividing by 4% gives you $2.5 million. However, you don’t need to accumulate all of that in one retirement account. It’s beneficial to have multiple income streams, such as a pension, a 401(k), and Social Security benefits. Ultimately, the amount you need to save will depend on your total expected expenses and lifestyle. 

If you find you’re not on track, take advantage of catch-up contributions. In 2024, you can contribute up to $30,500 annually to your 401(k) if you’re 50 or older. Maximize your savings wherever possible, including traditional IRAs, Roth IRAs, and Health Savings Accounts (HSAs). 

Did you know?   The COVID-19 pandemic led to a wave of early retirements, and new research from the Federal Reserve Bank of New York suggests a lasting impact on the U.S. labor market. As of March 2024, only 45.8% of workers expect to stay in full-time jobs past age 62, down from 54.6% before the pandemic – a record low since the survey began in 2014. There’s also a decline in those planning to work beyond age 67, soon to be the full retirement age for Social Security.1

5. Plan for healthcare costs 

Currently, your employer likely provides you with some form of health insurance. When you retire, though, you will more than likely be responsible for your policies. Depending on your age at retirement, this may include a private individual plan or Medicare. Your expected cost for a private individual plan will vary based on several factors including your health status and age. However, according to the 2022 Fidelity Retiree Health Care Cost Estimate, the average retired couple at age 65 can expect to spend around $315,000 on health care expenses in retirement.² 

Medicare covers some costs, but not everything. According to the Centers for Medicare and Medicaid Services, healthcare costs are predicted to increase by an average of 5.6% per year through 2032.³ Original Medicare includes Part A for hospital stays and Part B for doctor visits. However, many services you might consider essential – like dental, hearing, and vision care, as well as copays and prescription medications – are only available through additional plans that come at an extra cost. In general, it’s a good idea to budget between $450 and $850 per person each month for healthcare costs, which includes plan premiums and out-of-pocket expenses. However, this amount can fluctuate significantly depending on your specific circumstances and both your current and anticipated health or care needs. 

Healthcare costs in retirement will be more complicated than just insurance. You should also consider the cost of long-term care, home health care, or a retirement community if you think that is something you may want or need.  

Planning for retirement requires careful consideration and strategic planning. Learn how Mercer Advisors can work with you to create a retirement plan that helps you achieve your long-term goals.  

Not a Mercer Advisors client but interested in more information? Let’s talk.

 

3 Aidala, Felix, et al. “The Post-Pandemic Shift in Retirement Expectations in the U.S.” Liberty Street Economics, Federal Reserve Bank of New York, 8 May 2024. 

1 “How to plan for rising health care costs.” Fidelity Viewpoints, Fidelity, 12 August 2024. 

2 “CMS Releases 2023-2032 National Health Expenditure Projections.” CMS.Gov, Centers for Medicare & Medicaid Services, 12 June 2024.