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3 key factors to consider when planning for retirement

Ah, retirement. That moment we all dream about when we get to clock out for the last time and ride off into the metaphorical sunset. But to live your best retired life takes some thought and planning.

The sooner you start saving for retirement, the better. But if you’re later to the game, that’s okay, too. The important thing is to think about your biggest needs and wants in retirement and how much effort you want to put in to get there. Many people are surprised to find that their retired life is just as expensive as their pre-retirement life.

“Retirement expenses tend to fill in that gap of what people thought they would save on in areas like paying off their mortgage,” said Eric Maldonado, a certified financial planner and owner of Aquila Wealth Advisors in San Luis Obispo, California. “When every day is a Saturday, we tend to spend more.”

Here are some of the most important things to consider when planning for retirement.

(Photo: Getty)
(Photo: Getty)

When you want to retire

This might seem obvious, but when you retire is one of the most important retirement decisions you will make. For example, if you’re fascinated by the Financial Independence, Retire Early (FIRE) movement, where people quit working full-time well before traditional retirement age, you’ll have to live much more frugally, and invest more aggressively, than you would if you retired in your 60s.

On the other hand, if you like working (or just can’t afford to retire young), you might work well into your 70s. The older you are when you retire, the more money you’ll make and the more Social Security benefits you’ll rack up. 

Delaying the age that you start taking your Social Security — which is often tied to when you retire — matters, too. You can claim Social Security benefits as early as age 62, but you won’t get your full benefits until you reach full retirement age (between ages 65 and 67, depending on when you were born). Waiting until age 70 nets the highest possible benefits. That doesn’t mean you have to retire at age 70; you just have to wait to claim your benefits until then.

“Most people claim Social Security early, and that’s often the wrong choice," said Justin Pritchard, a certified financial planner with Approach Financial, Inc. in Montrose, Colorado. "If you think you’ll live into your 80s or beyond, it’s probably smart to delay claiming.”

How you want to live

happy senior woman sitting on a yoga mat doing her exercise
(Photo: Getty)

What does retirement look like for you — more feet-up-on-the-recliner or dashing off to exotic locales? Realistically, it will probably be somewhere in between. How you want to spend your time in retirement partly determines how much money you need. Maybe you’re okay living frugally and don’t expect your expenses to change much. Or maybe you want to spoil your grandkids or buy that summer house you’ve always dreamed about.

Where you want to live is also a consideration. If you’re planning to pull up stakes and move after retirement, plan your expenses around the cost of living in that city, too, not just where you live now. Also consider whether you will need to, or want to, keep doing paid work after you retire.

“Having work you love to do as an option in retirement not only keeps your mind and body active, but it helps you bring in supplemental income while in retirement,” Maldonado said.

Your health

Side view portrait of active man in his 50s drinking pink liquid fruit juice, head and shoulders, grey hair and beard, back from morning run, recovering, thirsty
(Photo: Getty)

How long you live after you retire is a major factor in how much money you need to save. It’s also a factor that is largely unknowable and out of your control. But you can make some educated guesses. 

If your family tree is chock full of relatives who lived into their 80s and 90s, you should bank on the fact that you could live that long as well. On the other hand, if you have a history of medical issues or your family does, you need to carefully plan for those expenses later in life.

“It’s critical to understand how long you might live,” Pritchard said. “With longer lifespans comes the risk of substantial health expenses and long-term care costs. A long-term care event can easily wipe out hundreds of thousands of dollars.”

Healthcare is one of the biggest expenses for most retirees, costing the average retired household $6,833 per year. Depending on how long you think you’ll live, and whether you have family to lean on, you might want to consider long-term care insurance on top of Medicare. Expect to spend at least 15% of your annual expenses on healthcare costs and to need about $300,000 saved for healthcare in retirement (based on today’s dollars).

So how much total money do you need to have saved or have in investments to retire? That’s a very personalized answer, but an easy method is to figure out how much money you would need to fund your lifestyle if you were to retire today, Maldonado said. Then multiply that number by 20. If your number is $100,000 a year, you would need $2 million in today’s retirement dollars. Of course, inflation also plays a role.

“If you plan to retire in 10 years, at an estimated 3% inflation, you would need about $2.68 million upon retiring,” he said. “That’s a very rough-draft idea to get you started.”

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