Saving for retirement is one of the most important parts of securing your financial future. While programs like Social Security can help, they often aren’t enough on their own. This is why it is crucial to have retirement savings of your own. You may be wondering exactly how much money is enough; for instance, could you survive on $800,000? Let’s take a look.
For more help planning your retirement, consider working with a financial advisor.
Determining Retirement Expenses
The first step to knowing how long your money will last is to figure out your living expenses:
Fixed expenses are those that don’t change from one month to the next. For example, this might include rent or a mortgage, insurance premiums and utilities. Add these expenses together and see how much you spend monthly and annually.
Variable expenses are expenses that are not the same every month. Many things could fall into this category, including travel expenses, health care costs, entertainment and charitable donations. Because these expenses are variable, you will likely have to set a limit on how much you can spend on them each month. If you reach that limit, you must either use money from elsewhere in your budget or forego the purchase.
Calculating Retirement Income
The next challenge is calculating retirement income. This can be more challenging than calculating your income while working because you might have more sources of income. For example, your retirement income might include:
- Social Security
- Pension plans
- Retirement savings
The good news is that Social Security and pension benefits don’t change from one month to the next. They might include cost of living increases each year, but their relative stability makes planning around them easier. What can be tougher to plan around is retirement savings, especially if you are relying on investments. You can use SmartAsset’s free retirement calculator to see if you are on track to meet your retirement goals.
Estimating the Length of Retirement
Another challenge of planning for retirement is estimating how long your retirement will be. This is not an easy question to answer, as many variables can affect life expectancy. However, estimating your life expectancy is an important part of retirement planning. People live longer than they used to, so it’s important to be prepared if you will live several decades after you retire. The life expectancy is currently about 77 years in the United States.
In addition to life expectancy, you should consider things like your current health and family history and how that will affect your life expectancy. Finally, you should use an inflation calculator to see how long your money will last.
Retirement Portfolio Styles
The next step is to determine your investment strategy. For example, your portfolio might be more on the conservative side, or it could be more on the aggressive side. Here is a quick look at how an $800,000 retirement portfolio might look, depending on your strategy:
With a conservative portfolio, your investments will consist mainly of relatively low-risk investments. For example, you might have:
- 50% bonds ($400,000)
- 30% cash ($240,000)
- 20% stocks ($160,000)
The goal of a conservative portfolio is generally one of wealth preservation rather than wealth building. Thus, you might also focus on blue-chip stocks that pay dividends rather than growth stocks.
A balanced portfolio may be appropriate for retirees who want a mix of growth and income and are willing to accept some risk in exchange for higher returns. An example of your asset allocation might be:
- 50% stocks ($400,000)
- 30% bonds ($240,000)
- 20% cash ($160,000)
This portfolio includes a noticeably higher allocation to stocks, and cash becomes the lowest percentage. A balanced portfolio often includes a mix of stocks, bonds and cash. It tends to focus on diversified investments that offer a mix of growth and income.
An aggressive portfolio may be appropriate for retirees with a longer time horizon who are willing to accept higher risk in exchange for higher potential returns. If you have an aggressive $800,000 retirement portfolio, stocks become the focus of your portfolio:
- 70% stocks ($560,000)
- 20% bonds ($160,0000
- 10% cash ($80,000)
An aggressive portfolio might include a mix of high-growth stocks and small-cap stocks. Some aggressive investors might venture into alternative investments like commodities or precious metals.
It’s important to note that these are just examples, and the right investment strategy for your retirement portfolio will depend on your individual goals, risk tolerance and time horizon. It is always a good idea to consult with a financial advisor before making any major investment decisions, especially when it comes to retirement planning.
How long $800,000 will last in retirement depends on factors like your expenses, retirement income and how long your retirement will be. If you have substantial income from sources like a pension and Social Security, an $800,000 portfolio could last for many years. That’s especially true if your expenses are low and you don’t have significant health care expenses. But again, there are many variables. It’s best to meet with a financial advisor who will help you build a custom retirement plan.
Tips for Retirement Savings
- A financial advisor can guide you through major financial decisions, like determining your investing strategy. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.
Photo credit: ©iStock.com/courtneyk, ©iStock.com/Fly View Productions, ©iStock.com/monkeybusinessimages