Saving for retirement is an exercise wrought with estimates and assumptions; none of which are known at the time of the calculation. As such, there is a lot of guesswork included in any retirement calculation. While financial planners use numerous models to help you identify what your financial needs will be in retirement, it is important to understand that these are only models and your retirement may be significantly different than others. If you are seeking an active retirement, full of travel or adventure, it is important to understand the different costs that may be associated with this lifestyle when saving for retirement.
Estimating your Costs:
Understanding the costs that you are likely to have in retirement is the most important function of planning for retirement. Even when you can calculate what your current costs are, there are many things that you will have to consider when you are performing a retirement estimate including a calculation of what impact inflation may have on your costs. Since future inflation is an unknown, you will either have to save additional amounts for inflation or choose investments that are inflation resistent when planning for your retirement.
In order to start understanding what you should save for an active retirement you should budget your costs. Plan out how much your living expenses will likely be including basic essentials, and then add amounts for what you want to do during your active retirement period. Examples of this would be travel costs and any other active expenses that you may want to incur in order to enjoy yourself. In other words, budget for what you need and for what you want to do during your retirement. Once this is complete, you will have an idea of what your needs during retirement will likely be.
Financial planners use a variety of assumptions for withdrawal rates. One of the more common models uses a 4% withdrawal rate. This means that you will be able to withdraw 4% of your savings without ever depleting the principal amount that you have saved. This is true because you are expecting to have earnings on your principal balance that offsets the withdrawn amounts. Of course, market performance and current bond rates can fluctuate and impact the amounts that you will actually be earning and can change the assumption rates significantly.
As a result, based upon this model, if your estimated costs are 4% of what you are planning on saving you will likely be able to cover your costs during retirement. If you are planning to retire at a later age you can likely reduce the amount that you will need and slowly draw down on your savings during your active retirement. Another consideration is that active people are often healthier and may have lower health costs during retirement.
Choosing your Investments for Retirement Money:
Finding investments that are inflation resistant may drive your future retirement. Stocks and real estate are often considered inflation resistant investments, while annuities and bonds pay fixed amounts that do not fluctuate with inflation. Finding investments that can provide for a growing income stream in retirement is an important part to funding an active retirement lifestyle.
Karen Bolt is a guest Blogger. Living in Tucson, she sees many Tucson active adult community such as The Highlands at Dove Mountain.