Are you one of millions of Americans making a New Year's resolution? If so, I'm going to help you be among the 8 percent of people (according to research from the University of Scranton) who will reach those New Year's goals.
The key to achieving your resolution, whether it's to lose weight, quit smoking or determine a retirement savings target, lies not in the specific goals you set, but in the questions you need to answer before setting those goals. For example, if you want to make fitness a regular part of your life, the first thing you need to do is ask yourself how much time you have to devote to exercise and what kinds of exercise you like doing.
Saving for retirement is similar. Sure, you can set a goal to build a nest egg worth $1 million, but how do you plan to get there? Setting a $1 million target is akin to firing a shot in the dark, unless you ask yourself the right questions to ensure you set a realistic goal specific to you and your situation. It's like playing darts while blindfolded. There's an outside chance you could hit a bull's-eye, but you're more likely to miss the target altogether.
How do you accurately set a savings goal for retirement? Get started by asking yourself these simple questions and let your answers help guide you through the next steps:
1. What kind of lifestyle do you picture for yourself in retirement? "Lifestyle" includes everything from your anticipated hobbies and activities to how often you'll eat out once you're retired.
Your next step: If you haven't already, create a detailed monthly budget based on your current expenses. Then create another budget based on the retirement lifestyle you want and how much money you estimate that lifestyle to cost. If you don't anticipate many changes in retirement from how you live today, creating that retirement budget is easy. But if you are expecting to make changes, you'll need to either increase or decrease your current budget based on how much those new habits may change your living expenses. Remember to consider areas such as utilities (which may increase as a result of being home more often) and transportation (which you may save on since you're no longer commuting to work).
2. Where do you plan to live? If you plan to move when you retire, do some research to find out how much property and income taxes may cost for your desired locale. And whether you plan to move or stay where you are, research the market for homeownership, home sales and home rentals so you can get a feel for the economic forecast for the area and how it may impact your housing expenses. Even if you plan to stay in your current home once you retire, you can't count on your property taxes staying the same throughout the years.
Your next step: Make adjustments to your budget to reflect any changes in tax rates (income tax and property tax) and/or the monthly cost of your mortgage or rent.
3. How many years do you expect to live in retirement? Our life spans have increased, which means some of us could spend more than 35 years in retirement. Whether or not you can realistically expect to live to 100, it's best to overestimate how long you might live as a retiree, so as to lessen the risk of outliving your savings.
Your next step: Using your expected age at retirement and estimated life span (which you can figure out with the help of the Social Security Administration's online life expectancy tables), determine the number of years you'll be retired. Then, multiply your estimated monthly budget by 12 to see your annual budget and multiply that annual budget by the number of years you expect to be retired. This number represents your estimated basic living costs during retirement. Don't forget to factor inflation into your calculations, or you'll find yourself severely underestimating your savings needs. You can either use an online calculator, or, if you like doing math, an annual inflation rate of 3 percent should get you a ballpark figure.
4. Do you currently own, or plan to purchase, long-term care insurance or an annuity designed to help pay for long-term care? For many retirees, long-term care is the single largest expense during retirement. Nonmedical care is generally not covered by health insurance or Medicare, and most forms of assisted living (including in-home help) fall into the long-term care category. A long-term care insurance policy can greatly reduce the financial burden of long-term care.
You next step: This is a wild card, and it can be difficult to find a clear-cut way to budget for long-term care needs. You may never need long-term care, but if you do, it could cost hundreds of thousands of dollars. You can attempt to estimate that burden to factor into your calculations, or you can include a monthly insurance premium in your budget.
Keep in mind that many of the factors that will influence your retirement expenses are fluid and likely to change over time. That's why you'll need to revisit these questions every few years to see if those changes will alter your retirement savings goal. But you have to start somewhere, and now that you've estimated your costs during retirement, you can adjust your finances and investing strategy as needed. Hopefully this strategy will put you in the optimal position to save enough for retirement in 2014 and beyond.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
More From US News & World Report
- 7 Tips to Help Millennials Save in Retirement
- 5 New Year's Resolutions for New Retirees
- 5 Steps to Get Your 401(k) in Shape for 2014
- Personal Finance - Career & Education