The Employee Benefit Research Institute study on the Expenditure Patterns of Older Americans shows that as we age our expenses decline. Using 65 as their benchmark they found that household expenses drop by 19 percent by age 75. And by age 85 they are 34 percent lower.
The study also found that people over 50 spend between 40% and 45% of their budget on housing. The point is that by the time we retire our expenses are significantly lower. That’s why financial experts tell us that we will only need about 60% to 80% of our prior income when we retire.
So, is one million dollars enough money to retire on? Let’s say you retire with a household income of $100,000 and you use the 80 percent income benchmark as your goal. You will need $80,000 a year to maintain your previous lifestyle. Assuming your 401(k) savings grow at 8% you can expect to have $80,000 a year in investment income without having to touch your principal.
What if you only have a half-million stashed away? How much trouble are you in? Will you have to cut your lifestyle expenses in half? A study by the National Institutes of Health, NIH, found that roughly 80 percent of seniors owned their own homes, and of those, roughly 55 percent owned them free and clear. The majority of the remainder had very little mortgage debt remaining. This is good news, because your home can help to support you in your golden years.
A mortgage free home can be a source of income from a reverse mortgage which can be added to your retirement income bottom line. Social security, pensions and other annuities also contribute to your retirement income bottom line. So when calculating the amount you need in your 401(k) it is important to consider the big picture of your finances which includes all of your available assets.
It goes without saying that it’s always best to have as much as you can in your 401(k) but not to rely exclusively on it for retirement. Contribute as much as possible and follow the rule of thumb that says; when you employer matches your contribution take advantage and throw in at least the amount you need to in order to obtain the maximum matching contribution.
Your retirement plan should include more than your 401(k) for several reasons. The first is volatility. Imagine you turned 65 and retired a month before the markets crashed in 2008 and all you were counting on for income was your 401(k). Now wipe the sweat off your brow and relax you would have regained most of those losses by now and you’ve learned a valuable lesson about putting all your eggs in one basket.
Diversify your retirement savings plan as much as possible, including doing your best to pay off or at least pay down your home mortgage. When it comes to your 401(k) save as much as you can while still contributing to other sources of retirement income including annuities, pension funds (where applicable), life insurance and other investments.