June 9, 2020
What to Consider When You Choose a Retirement Target Date
Figuring out, and setting, the target date that works.
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Your retirement age, like your career trajectory, isn’t set in stone. So how do you know when to retire? Is it when you hit a certain age — like 65 — or when you have enough money? Is there another threshold you’ll need to achieve?
There’s no right answer to these questions, as every situation is different. But once you’re ready to set a retirement target date, you will undoubtedly have concerns about whether you’ll have enough money to live off your savings, which may include:
- Retirement savings from your IRA and/or 401(k) accounts;
- Other savings, including investments or health savings account (HSA) funds;
- Income from rental properties or other assets;
- Social Security benefits (which vary, depending on what age you decide to retire).
There are also other factors, such as whether you’re a business owner (or employee), how much you enjoy working, or whether you’ll relocate to a less-expensive dwelling, that could influence your decision.
So, well, then, how do you actually decide?
Planning Your Post-Retirement Expenses
Before you set a target date for retirement, you’ll want to plan strategically on what your annual expenses will be, and how much you’ll need in your bank account in order to retire comfortably.
While fixed expenses like housing vary, you’ll need to account for more than food and shelter. Your savings should include money for future needs like:
- Emergencies: From car repairs to travel, unexpected stuff happens all the time. Many financial planners recommend that you always have access to six months of living expenses in your emergency account at all times. If you’re not planning to work at all in retirement or contribute toward your emergency account during your retirement years, you may want to save even more now.
- Healthcare: While Americans ages 65 and older are still eligible for Medicare, this benefit isn’t entirely complimentary. The service doesn’t cover 100 percent of all elective surgeries, procedures, or ancillary healthcare services that might significantly improve your quality of life.
- Unfulfilled desires: The Golden Years are often associated with vacations to exotic destinations and with good reason — once you’re no longer working, you may have more time to enjoy and explore life. But most excursions aren’t free.
Saving With the Target Date in Mind
Financial planners recommend you should save enough to replace 80% of pre-retirement income, and account for a 4% inflation rate. So if you’re 55, make a salary of $100,000 but — at your current spending rate — won’t be able to save enough to live off $80,000 per year between ages 65 to 85, you’ll need to push back your retirement a bit, past age 65.
Here are several factors to consider before setting a target date:
- Your current financial situation: If you continue to save at your current rate, will you have enough money by age 65 to cover 20 more years of living expenses? If the answer is “no” then you may not be ready to retire at 65. Or you’ll need to take some other action now to ensure you have enough money by the time you’re eligible for Medicare.
- Your outstanding debt: You’ll want to make sure you aren’t encumbered by debt like high-interest rate credit cards, or even mortgage payments before you retire. If interest payments are steep, see if a Home Equity Line of Credit would make sense for your financial situation or lower your interest rates.
- Your ability to save more: Assess how much you’ll need when you retire based on these aforementioned factors. You can analyze your expenses and spending to help you figure out what you can do to save even more money — say, an additional $500 per month — over a given time period.
- Your spouse and/or partner’s financial situation: Is your significant other on the same savings path as you are, with a retirement target date in mind? Their income, savings, and financial goals could influence yours if you plan to retire at or around the same time.
- Your asset allocation. Working with your employer to set up the right asset allocation could yield higher returns than if you’re investing on your own.
Ways to Lower Your Expenses
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Finding the right retirement target date isn’t always easy — but once you do, this date can serve as a benchmark, and help you tailor your current financial activities so you ensure you don’t have to push back that date. Calculate your retirement income to see how long your money will last with Silvur. You’ll be able to address your concerns immediately and learn what more you can do to ensure you won’t have to push back your target date too far into the future.