Retirement planning
and expenses

Confused about how to save for retirement? Concerned about how much you should have put away? Having a plan can make it easier. Here are some things you may wish to consider today.

 


Jump to learn more about retirement planning:

Start saving | Prevent outliving your savings
Decide when to retire | Manage inflation

Or jump to explore common retirement expenses:

Health care | Taxes | Living expenses | Family member support


How do I start saving for retirement?

A trick to building savings is to invest early and often. From 401(k)s and individual retirement accounts (IRAs) to Social Security, get familiar with the tools and automatic savings features that can help you grow your savings. And if you didn’t start early – start now!

 

When it comes to taking action to save for your retirement, the more you focus on things you can control, the better.

How do I prevent outliving my retirement savings?

Having a plan in place to stretch your money can help ease worries of workers in retirement plans who are married with dependents who fear outliving their money. Investing early, working longer and maximizing your Social Security benefits are all strategies that can help you build savings to last throughout your retirement.

 

7 essential retirement planning habits

Listen to Chip Castille, Chief Retirement Strategist at BlackRock, describe the seven essential habits that current workers can emulate to build confidence in their retirement planning.

When will I be able to retire?

The definition of retiring “on time” has changed from 65 to whenever you’re ready. In fact, 33% of workers believe they will retire in their late 60s or early 70s.To determine when you can reasonably expect to retire, you may wish to consider both your sources of income and your monthly expenses.

 


Common retirement expenses:

Health care

Though you are eligible for Medicare beginning at age 65, it’s important to factor in the cost of Medicare’s monthly premiums, deductibles and co-pays. And, if you require prescription drugs later in life, you’ll incur additional costs. If you're transitioning from an employer that helped cover part of your health insurance to shouldering all the costs on your own, the added expense could take a chunk out of your savings. And there are services that Medicare won’t cover.

A long-term care insurance policy, while carrying a premium cost, can help defray future health related spending. Should you opt for a high-deductible insurance plan, you could benefit from a health savings plan (HSA) feature. HSAs allow you to save money today that you can withdraw without owing taxes—today or in retirement—if used for an approved medical expense.

Taxes

Withdrawals from your traditional 401(k) and IRA, as well as Social Security claims, all contribute to your retirement income. Which means these withdrawals may be subject to income taxes.

Here’s how it works: Even if you don't need the cash, you must take required minimum distributions (RMDs) from traditional IRAs when you turn 70 ½ years old. Such withdrawals generally are taxed as ordinary income. Depending on the size of your RMDs, you might even find yourself bumped in a higher tax bracket.

(Note: Roth IRAs don't have withdrawal requirements, and you may not have to make
401(k) withdrawals if you are still working.)

As for Social Security, individuals with incomes of more than $34,000 and married couples filing joint federal tax returns with more than $44,000 in income generally owe federal income tax on up to 85% of their benefits.

But there are strategies to help reduce your taxable income in retirement. For example, if you have the option of saving in a Roth 401(k), all withdrawals in retirement are tax free (and Roth 401(k) assets rolled over to an IRA are generally exempt from the RMD rule). Or you might consider converting some traditional retirement plan assets into Roth IRAs today. In this case, you’ll owe taxes today. But converted money is generally tax free in retirement, and there are no required withdrawals.

Living expenses

About one in four American homeowners aged 65 and older are still making mortgage payments. What’s more: Housing-related costs account for about 40% of older Americans' spending (see the chart below).


Household expenses vary by age

Health care costs tend to increase steadily after age 85*

expenses

*Average share of different categories in total household expenditures, 2003-2011, across different ages.

Downsizing can be one way to reduce your housing expenses—especially if it means being able to pay off a mortgage.

Supporting family members

With average lifespans increasing, some pre-retirees (often referred to as “the sandwich generation”) are in the unique position of providing financial support to their parents, their children and their grandchildren. For example, one in five middle-aged Americans provide financial support for a parent who is at least 65 years old. And, 48% of parents with adult children provide them with some amount of financial support on an annual basis. Meanwhile, it’s not at all uncommon for grandparents to contribute to a 529 college savings plan or to help pay for other education costs.

If you find yourself in this position, you might consider using our retirement expense worksheet, which is designed to help you think through these and other expenses that you may face in retirement.

 


How can I manage inflation?

You may be on a fixed income, but, thanks to inflation, there's nothing fixed about the expenses you'll pay throughout what can be a very long retirement.

How far will your current savings really go? Let’s take a simple example: If you wanted to buy a cup of coffee each morning every day of your retirement, how much money would you need? The following graphic shows the calculation for a $1.95 cup of coffee over a 30-year retirement.

The real cost of coffee

For illustrative purposes only

As you can see, we’re left with a lump sum of $21,352.50. But that assumes that the cost of a cup of coffee will stay the same over the next 30 years. Does that seem likely? Probably not. But how can you predict how the cost of a cup of coffee will rise or fall in the future?

If you're 55 to 74, you can estimate how much retirement income your current savings may provide by using our CoRI™ Retirement Indexes retirement calculator.