A basic estate plan usually begins with executing a Last Will and Testament; however, as your family and your estate grows, your estate plan should grow as well to become more comprehensive in nature. At some point you will likely add a retirement planning component to your estate plan. Knowing you need to plan for retirement is the easy part. The hard part of retirement planning is knowing how much you will need to live comfortably during your “Golden Years.” Unfortunately, there is no “magic formula” that tells you exactly how much you will need to save for retirement; however, there are some commonly accepted factors you should consider and a few strategies that are frequently used to decide how much to save for retirement.
Why Is Retirement Planning So Important?
Back when your parents, or grandparents (depending on your age), were entering the workforce the concept of “lifetime employment” was still common. Pensions were also a common, even expected, benefit of lifetime employment. Finally, Social Security once paid benefits that would actually support, or at least come close to supporting, a retiree. Today, fewer and fewer workers expect to retire from the company with which they started their career. Pensions have all but become a thing of the past and Social Security benefits have not kept up with the cost of living increases in the intervening decades. The end result is that if you don’t plan ahead for your retirement yourself, you could end up woefully unprepared.
Should You Count on Social Security?
Although it is clear that you should not count on Social Security benefits to fund your entire retirement, the question still remains whether you should count on Social Security at all in your retirement planning endeavors. Sadly, the fate of the Social Security system in the United States has been the subject of much debate in recent years. As the Baby Boomers start to retire, the concern is that there will not be enough workers to contribute to the system to keep it afloat. For now, however, experts suggest that you operate on the assumption that Social Security retirement benefits will survive in some fashion. If the system survives relatively unchanged, the amount of your benefit will depend on your earnings from your working years. The average S.S. benefit for 2016 was $1341.
Retirement Planning Factors that Help You Decide How Much You Need
The need to supplement your expected Social Security benefits should be clear – but by how much? Some commonly accepted factors and strategies that may help you decide the answer to that question include:
- Your Life Expectancy – people routinely underestimate how long they will live. Obviously, none of us knows with certainty how long we have; however, the average life expectancy of an American has increased significantly in recent decades. Online tools, such as “How long will I live?” can help you estimate your life expectancy so you know for how many years you must plan.
- Know how much you spend – if you are a budget lover already, you probably know to the dollar what you spend each month right now; however, if you are not one to stick to a budget, take the time to figure out how much it costs you to live right now. Most experts agree that if you were to retire right now you would need about 80 percent of what you spent pre-retirement to live the same lifestyle in retirement because you cut out a number of work related expenses when you retire. Once you have the number of years you will likely live after retiring and the estimated cost to live how you live now, you can do some simple math and multiply the number of years by the cost per year for a ballpark figure of what your basic retirement expenses will be.
- Long-term care costs – retirement planning should always take into account the likelihood of needing long-term care (LTC). If you plan ahead, you should qualify for Medicaid to help with those costs; however, if you fail to plan ahead your entire retirement plan could fail because of the high cost of LTC should you need it.
- Inheritance – if you wish to pass down an inheritance to family members and/or loved ones, make sure you factor that in first by essentially removing that inheritance amount from your calculations. In essence, assume those assets don’t exist.
For more information, please join us for one of our upcoming free seminars. If you have additional questions or concerns about retirement planning in California, contact the Collins Law Firm by calling (310) 677-9787 to reserve for a Free Estate Planning Workshop.