5 Important Retirement Questions You Must Answer

Track Your Retirement Planning Progress With a Few Basic Questions

retired woman gardening with granddaughter
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Retirement is a goal that the majority of Americans want to reach. Despite knowing the basic importance of taking steps to save for retirement as early as possible, many people wait too late to get started. Another potential roadblock on the path to retirement is that not everyone shares the same definition of what “retirement” actually means to them. 

No matter what your ideal vision of retirement may be, you need to be able to answer some important questions to make your dream become a reality.

Here are five basic questions that should be at the core of all retirement planning activities:

What do you look forward to doing the most during your retirement years? During your 20’s, 30’s, and 40’s it can be difficult to fully envision how you spend your financial freedom years. Once you reach the 10-15 year window prior to retirement the sense of urgency will likely increase. Whether you are just starting your career or ready to start winding things down soon, make time to identify the “why” behind your retirement. This starts with a general understanding of what you look forward to doing the most.

Use these additional questions to help guide you:

  • How do you currently spend your free time?
  • How often do you plan on traveling to see friends or family? 
  • Will regular vacations be part of your plan?
  • Do you want to work part-time, volunteer, or start a business?
  • Where will you decide to live? 

If retirement is a distant dream or you have no idea when you want to leave the workforce, simply focus on the things that you currently enjoy spending your time doing today.

Your personal definition of retirement may be as simple as having the opportunity to devote more of your time and resources toward the things you already enjoy doing today.

How long do you most likely need your money to last? This question is really asking how long you plan on living. Life expectancy isn’t really something you may enjoy thinking about, but the reality is that your expected longevity will play a significant role in your retirement planning projections.

The longer your life expectancy, the greater the anticipated cost of retirement.

When the average couple reaches age 65 there is a greater than a 50 percent chance that one person will live beyond 90. Before you can estimate how many years you will spend in retirement, you obviously need to figure out when you want to retire. I always suggest using as realistic of a life expectancy as possible. But you also should personalize your assumptions based on your own health and wellness history as well as your family’s history of longevity. If you are not quite sure about this one, you can use the average life expectancy (men — 85 years; women — 88). If you have no idea which expiration date to use (or your retirement date is a moving target) you can use a few different retirement scenarios to compare your options for each realistic retirement date.  

How much retirement savings will you actually need? The best approach is to start anticipating whether you plan on simply trying to maintain your existing standard of living or anticipate requiring more or less. If you have 5 years or less until your desired retirement age you should complete an actual budget plan for retirement. Otherwise, the general guidance is to initially target a 70-90 percent income replacement rate.

You can always adjust this up or down depending on if you want to enjoy a more active or a more frugal lifestyle.

Are you curious to know why less than 100 percent of pre-retirement income is generally needed to maintain your same lifestyle? Most research studies suggest that retiree expenses on average are typically between 70-90 percent of pre-retirement income. Just keep in mind this number is merely a ballpark estimate and reviewing your current and future budget is a more reliable method of figuring out your desired income amount. Many other factors such as your planned lifestyle expenses, future inflation rates, anticipated health care expenses, and whether or not you will be debt-free influence the total amount of savings needed to fully fund your retirement.

Here is a pretty straightforward calculator you can use to estimate how much your retirement accounts will be worth at retirement.

It also can help you see if you are on track to reach your retirement income goals.

How much should I be saving today? The easy answer to this is as much as possible. In order to replace about 80 percent of your pre-retirement income, you will generally need to save about 10-20 percent of income throughout your working years. This can be a tough pill to swallow if you are in the early stages of your career or focusing on paying off high-interest consumer debt. If you cannot save as much today as you would like at least try to contribute up to your employer’s matching contribution if available. Debt-reduction does more than help improve your financial wellness. It is also an important step in the retirement planning process. If you want to back into your desired savings amount, run a basic retirement calculation to assess your actual target savings amount to get you on track.

How much of your retirement nest egg can you afford to spend each year when you retire? Conventional wisdom among financial planners often relies on a “safe withdrawal rate” of 4 percent per year. The Rule of 25 is very similar to the safe withdrawal rate. It means that in theory, you need 25 times your first year’s additional income needs for your retirement nest egg.

This means if you have $50,000 per year in retirement expenses not covered by defined income sources such as Social Security, pension, or other income sources, you will need $1.25 million (25 times $50,000) to reach this income goal. Remember this is a general guideline and the term “safe withdrawal rate” can be extremely misleading. Perhaps the biggest thing is to remain flexible during your early retirement years as the real safe withdrawal rate depends on the sequence of investment returns and inflation rates during the first 10 years of retirement.

It probably comes as no surprise that retirement planning is the top financial planning priority for the majority of American workers. Unfortunately, most of us spend more time planning for a big trip or a major purchase than for retirement. The good news is that the entire retirement planning process can be much less overwhelming if you simply focus on these five important questions.

Are you interested in more information about how you can take charge of your financial life? If so, visit the Financial Independence Day site to learn more about the book What Your Financial Advisor Isn’t Telling You: The 10 Essential Truths You Need to Know About Your Money.

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