Estimating Your Retirement Income Needs

With retirement often lasting 20-plus years, it is important to be realistic about how much money you will need to achieve and maintain a comfortable standard of living in the future. While there are many variables in life that we can't control – taxes, inflation, and government programs like Social Security and Medicare – we can influence how much we save for retirement.

While retirement planning can be an overwhelming topic, you don't have to walk this journey alone. If you prefer a little assistance, whether you're in the beginning stages of planning or putting the finishing touches on a well-developed plan, the financial Advisors at South Carolina Federal Investment Solutions, through CFS¹, are here to help. If you want to try your hand at planning, this guide will help you estimate how much money you'll need to maintain your desired standard of living in retirement.

1. Use your current income as a starting point. One of your first steps is to estimate how much income you'll need to fund your retirement. That's not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and other factors.

It's common to project annual retirement income as a percentage of your current income. Depending on to whom you are speaking, that percentage could be anywhere from 60% to 90%, or more. This straight-forward approach is fairly common, but doesn't account for your specific goals. For example, if you desire to travel extensively in retirement, you might easily need 100% (or more) of your current income to make that goal a reality. Your income will likely change over time, so it's important to schedule regular financial checkups with a financial advisor to help analyze the impacts of those changes.

2. Project your retirement expenses. Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. It's not easy to project how much you plan to spend, especially if you have several years left before you retire. Keep in mind:

• The cost of living will rise over time. While inflation has become much higher in the last year, the average annual rate of inflation over the past 20 years has been approximately 2%.²
• Your retirement expenses may change from year to year. For example, early in retirement you may decide to pay off your home or purchase a car with cash. Other expenses, such as health care and insurance, may increase as you age. To protect yourself against these variables, build a comfortable cushion into your estimates (it's best to be conservative).
• A financial advisor can help. Consult with an expert to ensure your projected expenses are accurate and realistic.

3. Decide when you'll retire. Another important factor to determine is how long you'll be retired. The longer your retirement, the more years of income you'll need to fund it. This critical decision typically revolves around your personal goals and financial situation. Even though it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 could cost you a lot more than retiring at 65. The sooner you start to take Social Security, the lower your benefits will be if you do not wait until your full retirement age. In addition, your IRA and other savings accounts will have to sustain your lifestyle longer.

The age at which you retire isn't the only factor that determines how long you'll be retired. The other important factor is your lifespan. According to the CDC, in 2021, the average American could expect to live until the age of 76. We all hope to live to a ripe old age, but a longer life expectancy also means that you will have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. Although there's no way to predict how long you'll actually live, it's probably best to assume you'll live longer than you expect and to plan accordingly.

4. Identify your sources of retirement income. Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Common sources of retirement income include 401(k) plans or other retirement plans, pensions, IRAs, annuities, etc.

You can likely count on Social Security to provide a portion of your retirement income, at least until 2037. To obtain an estimate of your Social Security benefits, visit the Social Security Administration website, ssa.gov.

The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

5. Make up any income shortfall. With intentional planning, your expected income sources should be well-funded to see you through even a lengthy retirement. But what if it looks like you'll come up short? Don't panic — a financial advisor can help you take steps to bridge the gap, including:

• Identifying current expenses you may be able to cut, so you'll have more money for retirement.
• Shifting your assets to investments that have the potential to substantially outpace inflation (keep in mind that investments that offer higher potential returns may involve greater risk of loss).
• Right-sizing your expectations for retirement, so you won't need as much money.
• Working part-time during retirement for extra income.
• Delaying your retirement for a few years (or longer).

There’s no magic number that works for everyone, and your situation may change over time. However, the methods above can help you better estimate how much you'll need to save to retire comfortably. As always, the financial advisors at South Carolina Investment Solutions, through CFS¹, can help you chart a path to a secure retirement. It's never too late to start.

Source: Broadridge Financial Solutions, Inc.

¹Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members. CUSO Financial Services, L.P. and its representatives do not provide tax advice. For such advice, please contact a tax professional. Before deciding whether to retain assets in an employer sponsored plan or roll over to an IRA an investor should consider various factors including, but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.
²Calculated from Consumer Price Index (CPI-U) data published by the Bureau of Labor Statistics, January 2022.