Some people are careless regarding retirement, but most of us try our best to save as much as possible. Most people have a portion of their income allocated for savings. But only a few have an idea about how much we will spend once we retire.
To plan for your retirement, you need to clearly understand what your retirement needs are going to be and how you will spend your days of retirement. For instance, if you plan to go on a vacation after you retire, you will need to save much more than if you only plan to spend a sedentary lifestyle.
According to William Schantz, before you learn how much you need to save and when you have to be aware of what you want to spend. Depending on how many years you have left to your retirement and your spending habits, the answer to how much you need to save for your retirement is a huge “it depends.”
The Importance of Lifestyle by William Schantz
Some people want to carry on their lifestyle into retirement and continue living exactly as they are while working. While others want to cut down on their expenses, and yet others want to save all the enjoyment for themselves until they are retired. It is common sense to think that if we want to continue the same lifestyle, we will probably have the same level of spending. But it is not as simple, and retirement changes many things.
According to William Schantz, one of the best ways to determine your spending is to understand your replacement ratio. Say you earned $100,000 in the year before your retirement. You will need to calculate how much of that you spent in your last year working. You may use that as an estimate to understand how much you will need per year after retirement. You will also need to find ways to replace the amount you spend every year in one way or another.
Some people require less income after retirement. There can be numerous reasons for this, but the most common are:
- No more job-related expenses such as commuting, work clothes, or lunch at the office
- Lower income means fewer taxes
- No more saving for retirement – it is already retirement.
While it sounds reasonable that these expenses will go down, others might go up. For instance, if you love to travel, you will have more time for it. Similarly, if you play sports, such as golf, you will have more time to play, and increasing your playtime will also increase the bills.
William Schantz Explains Replacement Ratio
According to William Schantz, the replacement ratio estimates how much of a person’s pre-retirement income will be used to maintain the same lifestyle after retirement. Several factors help calculate the replacement ratio; these include pension, social security, retirement savings plan, and any other source of income. For instance, if you make $100,000 a year and need $45,000 to maintain your lifestyle, your replacement ratio will be 45%.
People with higher incomes will have a lower replacement ratio. This is because you will have more to save for retirement with a higher income.
Replacement ratios are a great way to determine how much additional income you will need during your retirement. But, like many other financial indicators, the replacement ratio is also an estimate. Down the years, life and circumstances can change, and so will your expenses.
William Schantz’s Final Thoughts
William Schantz believes there is no one answer to how much you should save for retirement because it varies from person to person. However, there are a few tools that you can use to estimate how much you will spend during retirement. One method is to carry forward your expenses from the year before your retirement, and the other is to use the replacement ratio method. Both these methods are effective but cannot portray the complete picture as you can never be certain how circumstances will shape post-retirement.