How Much Will It - Retirement - Cost? The First and Most Important Question to Design Your Financial Future

Knowing how much retirement will cost is what helps us determine how much to save every year.
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By Rob Ziliak, CFP

You know what the cost will be for nearly everything you spend money on, correct? Furnishing a room or two will cost $5,000. A family getaway this summer will add up to $7,500. Total expenses for your college-bound child’s education will run about $30,000 this coming year. A new car will cost $50,000. That perfect new home can be had for $800,000.

Rob Ziliak

Rob Ziliak, CFP

Until we know the cost in advance of making nearly any purchase, whether it’s expensive or inexpensive, we’re unlikely to spend the money. That’s just basic financial common sense, instilled into us as children.

We’ve learned, when we want something, to investigate how much it costs and then to save toward that number. This essential process, which is necessary for many reasons, is fundamentally the same when it comes to retirement. 

With retirement, however, the stakes are generally much higher than having to postpone a furniture purchase for another year or settling on a vacation. Saving too little can result in a prolonged working career, greater risk of disability, higher taxes, and significant risk of having to reduce your lifestyle in retirement relative to today. Too conservatively saving more than you need right now is better than saving too little, yet it can create substantial stress on funding your desired lifestyle and unnecessary dilemmas while working full time and raising a family. Additionally, over-saving for the future has risks, too — we’re not guaranteed to live a long, healthy life, so there’s something to be said for enjoying fully every year that we have.

So, why do so few Americans, in general, have an answer to the question, “How much will it cost to live in retirement?” After all, the amount of money we spend throughout our retirement years will likely exceed any other expenditure we make in our lifetimes, and, in some cases, by many multiples. Knowing how much retirement will cost is what helps us determine how much to save every year. A brief case study can illustrate this point.

Sarah transitions out of her career fully at 65 and her husband, Justin, retires from his job at the same age. They have no idea if they are financially prepared to retire, yet both are emotionally and physically ready to move into a new chapter of their lives. They feel that $2 million should be enough to sustain them, and the lifestyle to which they’ve grown accustomed, in their retirement years. However, with both in good health and longevity being a family trait, they each live to 90. If they had spent an average of $120,000 per year over their 25 years of retirement, their total cost of retirement was $3 million.

That wasn’t so hard to answer, was it? Except it’s important to notice how this example moved from the present tense into the past tense, particularly in regard to the calculations concerning how much it cost Sarah and Justin to have lived for a 25-year retirement.

When it comes to planning for our non-income-earning years, we simply don’t have the benefit of knowing the final cost before agreeing to spend the money.

Now back to our case study. Before retirement, Sarah and Justin spent $500,000 on their home, which was at that point the largest expenditure they had ever made. Before purchasing the house, they knew an assessed value, an appraised value, the annual property tax obligation, had it inspected for quality, and paid to have it insured going forward. Why is it that they would head into retirement, preparing to spend six times more than they did on their now second-biggest expense, with no clue about how much it would cost?

Your CPA asks, “How much are you going to save into your retirement accounts? I can’t complete your tax projections or returns until I know that number.” The investment advisor asks, “How much are you going to save into your retirement accounts? I can’t rebalance your portfolio or identify the right investment allocation until I know that number.” We will too often provide these advisors with an arbitrary amount of money we feel we can reasonably withdraw from a checking or savings account, ranging from a very small to a very large figure. Emotion, or possibly even a guess, is often included in such answers. Frequently, even your paid CPA or investment advisor will not be willing or able to specify an evidence-based answer, encouraging you to discretionarily decide how much you can afford to save.

So, if every person should know how much they need to save for the retirement they envision — either because they rely on a fiduciary financial advisor to help equip them with that number or because they’ve performed their own projections — how do you get there?

Fortunately, Monte Carlo simulations offer a measurable way to answer questions about how much you should save toward retirement, and that savings number should be reevaluated every 12 to 24 months. Like with any statistical measure, though, a Monte Carlo simulation’s output is only as valuable as the quality of the inputs, so not all simulations or simulators are created equally. It’s necessary to evaluate current and future spending levels, along with current assets, taxes, time horizon and expected investment returns, to anticipate whether you are saving enough annually. Levels of insurance need consideration as well. Refreshing the data you use, plus incorporating those changes in pursuit of future goals, is relevant for the accuracy of ongoing retirement projections, whether you are in the early, middle or final stages of a career. As a side note, conducting retirement projections does not end at the close of a working career. Retirees still need regularly updated retirement projections, as well as analysis to gauge how lifestyle spending and investments have performed relative to what initially was planned.

Upon completion of a customized, goals-based retirement projection, you are now fully equipped to understand the cost of the retirement you want, which means that you will also know the amount necessary to save each year to feel comfortable about achieving it. The benefits will be evident through a measured increase in net worth over time, and also through the emotional peace of mind that comes with a strategic plan quantifiably measuring and balancing the wants and needs of today with the wants and needs of the future.

The next time one of your advisers or financial planning partners asks you how much you’re going to save into your retirement accounts, look at the retirement projection and provide the number. Then go enjoy a round of golf, or a walk with your dog, or take that desired vacation, confident that you know how much your biggest expense will cost.

About the author: Rob Ziliak, CFP®

Rob Ziliak, CFP®, is the chief experience officer at Buckingham Strategic Wealth, where his mandate is to continuously identify and implement solutions that empower advisors to build, design and protect clients’ financial lives.

Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. IRN-21-1785