Are You Ready to Retire? Ask Yourself These 6 Questions

A woman calculates expenses and sets retirement budgets before planning to retire.

Retirement experts recommend saving at least 15% of your current salary each year for retirement. Another rule of thumb is that you’ll need 80% of your pre-tax income annually once you retire. If you’re confused about how much you should be saving each year, you’re not alone.

It’s important to determine what’s right for you along with that your lifestyle may look like in retirement. Even if retirement is decades away for you at this point, knowing how much to save now can help you properly prepare.

Here are 6 retirement questions to ask yourself that can help you determine how much you should be saving.

1. How Do I Define Retirement?

Being ‘retired’ can mean something different to everyone. While some people may see themselves staying at home and picking up some hobbies, others don’t. If you don’t plan out what you want to do, it’s easy to get bored during retirement and seek out activities that provide fulfillment. This is why it’s not uncommon to see retirees go back to work even if just for a part-time position.

You must ask yourself whether you want to completely stop working, or if you’d rather resort to flexible work whether it’s a side job or even starting a small business.

Also, narrow down what your overall lifestyle will look like. Will you plan on traveling more? Would you want to be more generous with your money or start funds for your grandchildren? Where will you live and how is the cost of living there? These are all important follow-up questions to ask because they will give you a good idea of how much you’ll want to aim to spend each year.

2. Will I Downsize and What Will My Monthly Budget Be?

Another way to narrow down how much you’d spend during your retirement years is to project what your budget might be. Most Americans aren’t saving enough to retire by 65 and social security income is becoming less and less reliable for future generations.

It’s more likely that you’ll run out of money or not have enough if you don’t estimate what your monthly spending will be. While it’s difficult to know exactly what things will cost years down the road, you can still sum up a list of general expenses.

For example, you know you’ll need to buy food and likely pay some utility bills. You’ll have auto insurance if you’re driving and even if your home is paid off when you retire, you’ll have to cover property taxes each year. Or, maybe you’ll want to sell your home, downsize to a smaller residence and save the profit.

Also, consider that you may not have any kids to raise by this time so this could drastically lower your expenses. However, you may have to pay increased costs for healthcare and life insurance as you age. According to the Bureau of Labor Statistics, retired households spend an average of 25% less than working households.

3. How Long Do I Need the Money to Last For?

This is always a tricky question. No one wants to see their retirement savings run out but it’s also impossible to know how long you’ll be around. Saying that you’re going to ‘save as much as you can’ is not the best retirement strategy. It’s much better to base your goal on real numbers like the desired age when you retire, life expectancy, and how much you’ll spend per year.

This is why the 25x retirement savings rule is so popular. The average life expectancy in the U.S. is 78.6 years. With the 25x rule, you’d save 25 times the annual amount you expect to spend in retirement. This means, if you’re currently spending $50,000 per year now but you expect to spend around $40,000 per year during retirement, you’d need to have around $1,000,000 saved (40,000 x 25).

4. Which Savings Vehicles Do I Want to Use?

How you save for retirement and when you plan to actually retire will be determining factors to help you decide whether you’re on track. The most standard retirement account is an employer-sponsored 401(k). Each year, contribution limits change but for 2020, you can contribute $19,500 annually and your employer may even match contributions.

However, you can not withdraw funds penalty-free until you turn 55. If you don’t have access to a 401(k) or just want to diversify your portfolio, you can invest in an IRA (Individual retirement account) which allows you to withdraw money for your retirement penalty-free once you reach 59.5 years old.

There are also other options like investing in ETFs and index funds on your own as well as investing in real estate. If you plan to own a rental property, for example, the cash flow may help you supplement expenses during retirement which means you may be able to get away with saving less.

5. Am I Saving Enough?

Everyone’s situation and goals are different. While the 25x rule or the 15% guideline may be a helpful benchmark, you also want to consider projecting your retirement savings goal based on your unique circumstances.

This is where a retirement calculator can come in handy. Check out the Fifth Third Retirement Savings Calculator where you can calculate your projected living expenses, desired age during retirement, and your current salary to determine how much you need to save.

This calculator helps you weigh all important factors including the fact that you may be able to claim some social security benefits by age 67. It just takes a few minutes to find out if you’re on track with retirement savings or a little behind.

6. What Can I Do to Catch Up?

Catch-up contributions allow you to contribute more to your retirement accounts once you reach a certain age. If you’re over the age of 50, you can contribute up to $6,500 extra each year to these accounts.

  • 401(k)
  • 403(b)
  • SARSEP
  • Governmental 457(b)

If you have an IRA, you can contribute an extra $1,000 annually once you reach 50 years old. This can be a great way to catch up if you find that you’re not on track with your retirement savings. If you’re 50 years old and don’t plan to retire until 65, you still have 15 years to invest and grow your portfolio.

Knowing whether you’re on track with your retirement savings can provide more peace-of-mind and also motivate you to stay the course. Asking yourself these important questions now can save you from any financial setbacks in the far future.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, Member FDIC.