There are many questions to ask and steps to take in retirement planning—ideally, starting with your first full-time job—but you may also find you need some questions or guidelines to routinely check to make sure you’re staying on track to reach your retirement goals, whatever those may be.
Here are five basic retirement questions that are key to retirement planning. Your answers can, and probably will, change as you approach retirement—and that’s okay!
What Do You Want to Do the Most in Retirement?
What you want to do in retirement is foundational to answering the other questions. And this makes sense: your lifestyle and activities in retirement will determine how much income you’ll need, how much you’ll need to save now, and where and if you’ll need to consider moving, among other things.
Identifying the “why” behind your unique take on retirement starts with knowing what you enjoy doing the most when not working. This could include gardening, traveling, being more active in your children and grandchildren’s lives, taking up a new or beloved sport, beekeeping, volunteering, restoring old cars—really the list is endless.
If you’re drawing a blank when trying to imagine how to fill your retirement days, consider these questions:
- How do you currently spend your free time?
- What do you wish you had more time to do?
- Are there any skills you wish you had the time to learn or improve?
- How often do you plan on traveling to see friends or family?
- Will vacationing be part of your plan?
- Do you want to work part-time, volunteer, or start a business?
- Where will you decide to live?
- Will you want to continue to work in some capacity?
How Long Does Your Money Need to Last?
Ultimately, this question comes down to estimated life expectancy. It may not be something you enjoy considering, but it cannot be ignored if you’re to enjoy successful retirement planning. Afterall, the longer you live, the more money you’ll need to save and to live off of.
You can start to answer this question by estimating when you’ll want to retire. From there, use your current health, wellness history, and family health history and longevity to estimate your life expectancy. Take your estimated life expectancy and subtract the age of when you want to begin retirement and that’s how long you’ll need your nest egg to last.
It’s smart to update this calculation throughout your life as you age, as your health changes, and as you adjust your expected retirement age. This will affect how you aggressively you’ll want to save and invest for retirement.
How much retirement savings will you need?
Once you have an idea of the lifestyle you want to enjoy in retirement and how long that lifestyle needs to last, you can answer this question!
general goal is to have 70%–90% of your pre-retirement income to spend each year in retirement. To calculate a more accurate figure, examine your current lifestyle and budget and determine what will change in retirement and how it will affect your budget. Consider increased healthcare expenses, inflation, debt obligations (or lack thereof), reduced living and tax expenses if you downsize, etc.
If you will own your home outright at retirement, this should be included in your calculations as a potential source of liquidity.
How much do you need to be saving today?
If you want to replace 80% of your pre-retirement income, you will typically need to save 10–20% of your income throughout your working years. Again, general figures like this can give you a start in answering this question, but you should take the time to create a more accurate model for your retirement planning. Your personalized retirement budget will help with this.
How much of your nest egg can you spend each year in retirement?
The oft-quoted 4% Rule is a good principal to start with. As you may have guessed, it states you can withdraw 4% of your retirement portfolio value your first year in retirement and then continue to withdraw the same amount, adjusted each year for inflation, for 30 years.
Let’s assume you have $1 million saved for retirement:
- Year 1: You’d withdraw $40,000 from your savings (.04 x $1,000,000 = $40,000).
- Year 2: You’d adjust your withdrawal to account for inflation (usually 2–3%). For example, if inflation is at 2%, your second-year withdrawal would be $40,800. ($40,000 x 1.02 = $40,800)
- Year 3: If inflation goes up to 3%, you’d increase your withdrawal again ($40,800 x 1.03) to $42,024.
As you continue to work, save, and watch the performance of your retirement portfolio, you’ll be able to see if this rule will work for you.