Personal Finance - Arla Wallace
Arla Wallace is an accounting professional with over 20 years experience. She spent several years working for both publicly-traded and private entities before founding her own business. Today she partners with small business owners so they can focus on operations while leaving the responsibility of staying on top of accounting tasks to her. She is a Certified Public Accountant (CPA) and a Certified ProAdvisor for Quickbooks Online.

Estimating Your Retirement Needs

Estimating Your Retirement Needs

Some retirees will travel; others will start a business. Some retirees will want to enjoy quiet time; others will work out to stay fit. Retirement will inevitably look different among those your same age. However, certain needs will have to be met so that retirement goals can be reached. And, what does one need to retire? Let’s find out.

Housing Needs

Some retirees will choose to age in place, share a home, or downsize and relocate. Others will choose to live in a continuing care retirement community (CCRC), an assisted living facility (ALF), or a nursing home. Aging in place can help maintain consistency, but may become a burden if there is a lot of maintenance and other costs to keeping up a home. Furthermore, the current housing situation may not be suitable for an aging body or may prove to be too far away from health care services. For financial reasons, a single retiree or widow/widower may find home- sharing to be beneficial. The retiree/homeowner can charge rent and utilities to the roommate and can even enjoy companionship by sharing their home. On the contrary, there are risks of sharing a home which include failure of a roommate to pay rent or difficulty getting along with someone else.

Relocation can help lower expenses and enable a retiree to move closer to family or to activities. However, moving comes with additional costs (hiring movers, travel costs, real estate closing costs). A CCRC can offer a retiree different levels of care and senior housing as needs change. This housing option often provides meals, transportation, and organized activities. The biggest challenge with CCRCs is the large down payments required at move-in and the risk of a CCRC running out of money or going bankrupt. ALFs afford the retiree a level of care that is required to maintain a standard of living (help in the form of bathing, dressing, or cooking). The costs of moving into an ALF can be expensive and it may be hard to choose the right place to fit your needs. Nursing homes offer full-time care to retirees and can improve quality of life when skilled services cannot be handled in the home or the cost of care in the home becomes too expensive. Nursing home care is very expensive and costs are rising.

Healthcare Needs

Healthy retirees tend to live longer lives on average than their unhealthy counterparts. As such, medical costs for healthy persons can be higher than those with chronic conditions. According to the 2021 Retirement Healthcare Costs Data Report, a healthy couple retiring in 2021 at the age of 65 will spend roughly $662K on healthcare throughout retirement. Furthermore, healthcare costs are expected to continue to rise at two to two and one/half times the U.S. rate of inflation. Healthcare costs in retirement can be funded through a health savings account (HSA), traditional and Roth retirement accounts (IRAs), or through an emergency fund. HSAs grow tax-free and contributions can be made until you turn age 65, even if you are not working. IRAs are long-term savings that can be used to meet health care costs in retirement. IRA withdrawals are penalized if money is taken out before age 59½. An emergency fund may be helpful to meet both expected and unexpected medical costs. Bank accounts housing emergency funds are quicker and easier to access than HSAs or IRAs.

Financial Needs

Pre-retirement annual income is a good starting point for estimating the money needed in retirement to live comfortably. For some retirees, 100% of pre-retirement income will be needed, while others may be comfortable at 70-80% of this amount. Retirement income may come from multiple sources including Social Security, employer pensions, savings and investment accounts, or wages earned in retirement. If possible, make the maximum contribution to retirement accounts, including catch-up contributions before retirement. Additionally, downsize your debt so that loans will be paid off before you retire, and consider paying cash for major purchases in lieu of adding to credit card debt.

Estimating retirement needs—housing choices, medical costs, along with income and expenses— should be considered carefully so that retirement can be enjoyed. While planning for retirement should be done in advance, it is never too late to get started and make adjustments to help ensure you have just what you need.