January 7, 2019 • Retirement 101 / Articles and Insights

How Much Monthly Income Will You Need In Retirement?

Whether you’re just a few years away or two decades from retirement, now is a good time to think about your retirement goals. How much money will you need to travel, participate in leisure activities, or to simply maintain your lifestyle?

Determining the amount of income you’ll need in retirement is one of the most important parts of the planning process. But the amount needed is different for everyone and depends on factors like your retirement lifestyle, where you'll live, and how healthy you'll be as you age. And then there’s the biggest unknown: how long you will live. 

While there’s no magic formula to determine the exact amount of income you’ll need, there are some questions you should ask yourself and some calculations you can do to be sure you have the income you need in retirement.

Retirement Income

No one wants to outlive their money. When planning your retirement income, here are three factors to consider when creating your retirement strategy:

  1. Your retirement lifestyle and expenses
  2. Your income sources
  3. How long you might live

Your Retirement Expenses

To determine how much income you’ll need in retirement, you must first estimate your expenses. Fortunately, you probably have a fairly good idea about how much you’re spending now, and there are tools to help you estimate your retirement expenses.

Keep expenses like housing, food, insurance, transportation, and personal care costs like clothing, products, and services in mind. Also, don’t forget expenses like entertainment, eating out, and vacations. Try to determine whether those expenses will increase or decrease in retirement.

Some say you should plan on spending about 80 percent of what you spend today in retirement, but that doesn’t necessarily take into consideration medical expenses and insurance deductibles and co-pays, which should be factored in as well.

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Must Have vs. Nice to Have

It’s also helpful to determine which expenses are essential and which expenses are discretionary. Essential expenses are things you cannot live without and, usually, you cannot change the amount you pay for them. They typically include things like mortgage/rent, insurance, medical expenses, and food. 

Whether an expense is essential or not will vary by individual, but it is important that you and your spouse (or partner) agree on which expenses are necessary and which aren’t.

Your Income Sources

Once your expenses are in order, it’s time to look at your income.

There are some common sources of income in retirement: Social Security, retirement accounts such as IRAs or 401(k)s, investments, pension plans, annuities, and even part-time employment.

When considering sources of income in retirement, it's important to evaluate how much of that income you need to be guaranteed.

Guaranteed vs. Non-Guaranteed Income

Guaranteed income is income that will continue at the same payment amount, no matter how long you live. Sources of guaranteed income generally include Social Security, pension plan benefits, and annuities.

Remember those essential expenses? They’re important to calculate so you can determine whether you will have enough from all of your guaranteed income sources to cover them. Unless you’re independently wealthy and have a few million saved for retirement, you’ll likely need to guarantee that your income will last as long as you do.

A simple way to calculate how much you’ll need in guaranteed income is to take the amount of monthly income you anticipate from guaranteed sources and subtract the essential monthly expenses. 

Unless you’re independently wealthy, you’ll likely need to guarantee that your income will last as long as you do.

A simple way to calculate how much you’ll need in guaranteed income is to take the amount of monthly income you anticipate from guaranteed sources and subtract the essential monthly expenses. 

For example, if you anticipate receiving $2,000 a month in Social Security and you want to cover at least $3,000 in expenses with a guaranteed income source, you will need an extra $1,000 a month. One option to cover the extra expense would be to move money from non-guaranteed income sources, like a 401(k) or other investments, to an annuity. 

One type of guaranteed income annuity is a fixed index annuity, or FIA. They provide the potential to earn interest when the markets go up, guarantee no losses when the market goes down, and turn on a guaranteed income payment when you need it. Annuities can offer income through monthly payments for life, or you can choose a select period of time you think you'll need the income. Your financial professional can show you annuity products that may work for your situation.

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Your Longevity

How long you will live depends on many things, like your gender, your genetics, your lifestyle, and your fitness. Today, on average, men who are 65 will live to be 84, according to the Social Security Administration, and women who are 65 will live to be 86.5. Additionally, one in three 65-year-olds will live past 90, and one in 10 will live past 95. However, the fact remains that with all the different factors and influences on longevity, no one knows for sure when their life will end—which makes retirement planning with guaranteed income even more important.

 

Now that you’ve looked at factors that will affect how much monthly income you need in retirement, it’s time to review your retirement strategy to ensure you have enough guaranteed income planned in retirement to maintain your lifestyle. A financial professional can help you find out what retirement strategies fit your needs and your goals for retirement.

Annuities are long term financial products designed for retirement income and may not be suitable for everyone. They involve fees, expenses and limitations, including surrender charges for early withdrawals. Some include optional riders and benefits that may come at additional cost. Annuity product and feature availability may vary by state.
 
Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing company.

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