While planning for retirement and financial planning for seniors are hot topics in financial circles, it appears most Americans only begin to think about what the next phase of life might look like in their last decade of work. According to the American Association of Retired Persons (AARP), more than 48% of American households headed by someone age 55 or older have no established retirement savings or have not begun their financial retirement planning.
Whether you have been saving for years or are just beginning the process, the questions around planning to leave the workforce can be intimidating. How do I know what tools will help me make decisions? What is the best retirement calculator? How is retirement calculated? Answering these questions is easier when you have a big-picture retirement strategy in place, when you understand what tools are available and when you know how to use those tools.
How is Retirement Calculated?
When thinking about retirement planning, it is common to wonder what you will spend and where the money will come from. A portion of the income most retirees live on comes from Social Security benefits. It is important to note that Social Security benefits are based on lifetime earnings. Each person’s actual earnings are adjusted, or “indexed,” to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. While the actual breakdown changes a bit each year, the monthly wage in 2023 breaks down into three parts as follows:
- 90% of the first $1,115 of your average indexed monthly earnings;
- plus 32% of any amount over $1,115 up to $6,721;
- plus 15% of any amount over $6,721.
Once there is a basic understanding of how much Social Security benefits will pay during retirement, it is easier to understand how much an individual person will need to save in order to support their retirement lifestyle. In the U.S., a person can expect to spend between 55% and 80% of their pre-retirement annual budget every year throughout retirement. For retirement planning purposes, 75% is a good starting point. This means, a person who makes $100,000 before retirement will need $75,000 per year during retirement. Most people need less income during their retirement years for many reasons, including:
- It is common for people to spend less in retirement.
- During the working years, a portion of income is directed toward saving for retirement, which is no longer necessary.
- Taxes will likely be lower after retirement.
How to Use Retirement Calculators
A retirement calculator is the perfect tool to help create a snapshot of what your financial future might look like. With all the options out there, it can be difficult to know which is the best retirement calculator. Designed specifically to support individuals who want to learn more about their retirement options, the AARP Retirement Calculator is a user-friendly, accurate choice. It provides insights on each page – marked with an information icon – that explain the questions they are asking and why those questions are important. Follow these six simple steps to use the AARP Retirement Calculator:
- First, the retirement calculator will ask questions about your household status, current retirement savings and current salary.
- Be sure to include information about any supplemental retirement income, such as Social Security benefits or pension payments.
- Consider how long you plan to remain in the workforce and set a retirement goal.
- Think about what you want your lifestyle to look like in retirement. Do you want to work part-time? Do you want to travel? Do you want to upgrade your lifestyle? Or downsize your home?
- The retirement calculator will then provide a graph of your money now and estimated financial picture in the future.
- Finally, the tool will present options for ways to either save more for your ideal retirement or stay on track.
When using the AARP Retirement Calculator – or any retirement calculator tool – it is important to remember that the information provided is intended to be used a resource, not to provide specific investment advice. AARP encourages anyone using the tool to also consult with a financial professional to discuss retirement planning.
About Tutera Senior Living & Health Care
With decades of experience supporting seniors and their families to find their ideal retirement, living and care environments, Tutera Senior Living & Health Care is uniquely suited to serve you and your loved ones as you explore options for living and care. Offering independent living, assisted living, memory care, Thrive memory care, rehabilitation and extended stay and a respite program, we are able to meet your needs at every turn.
Each resident’s personal goals and opinions are at the heart of everything we do at Tutera Senior Living. We refer to this as our YOUNITE philosophy – one that is built around you from the very moment you move in and each day after. We get to know your likes, dislikes, goals, dreams and challenges, and we create a unique living and health care experience that is just right for you. Each Tutera Senior Living community offers services, amenities, team members and culture that work together to encourage residents’ independence and to respect their individuality.