Is Retiring 'Comfortably' Becoming a Myth?

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Retirement used to be a given. Put in your 30 or 40 years of service (often at the same company) and your pension would let you live out your retirement in relative comfort. Then most companies replaced pensions with 401(k)s, putting the burden of saving on workers, rather than the company. (Which isn't necessarily a bad thing -- pension funds can fail if the company goes under or manages the funds poorly.)

As inflation skyrockets and wages stagnate, is retiring comfortably even possible anymore? Are we all destined to work until 80 and live off of ramen?

There is good news: retiring comfortably is still possible, but requires careful planning and investing money now so you can live comfortably later. And there are a few things to consider to make sure your retirement is comfortable.

Social Security may not pay full retirement benefits by the time you retire

The Social Security Administration released its annual report in May of this year. One of the key takeaways was a projection that the trust fund will only be able to pay full benefits until 2035. We've been hearing "Social Security won't be around by the time you retire!" for decades, so what does this really mean?

If Congress does not act (by raising the retirement age, taxes, or taking a similar step) by 2035, the fund will only be able to pay out 83% of benefits. So if your projected monthly payment is $2,000, you'll only receive $1,660 in benefits.

This isn't set in stone, though. When these projections have come out in the past, steps have been taken to ensure Social Security benefits can be paid. But Social Security benefits may not be fully paid if you retire after 2035 -- and even if they are paid in full, it's unlikely to be enough to live on comfortably. It's worth keeping in mind.

What do you really need to live comfortably in retirement?

Most financial planners say you'll need 80% of your pre-retirement income to retire comfortably. That means if you earn $100,000 per year now, you want $80,000 per year in retirement. If you use the 4% rule (meaning you withdraw 4% of your balance every year), that means you'll need $2 million in retirement savings. Ouch.

There are other factors to consider, however. Social Security will likely still be around, so while you shouldn't expect it to cover all your retirement, it will help. You can also sell assets (like your home) to supplement retirement savings.

And there's another consideration -- will you really need 80% of your pre-retirement income?

Say your current monthly budget looks something like this for a family of four:

• Mortgage: $2,400

• Groceries: $1,000

• Car insurance: $200

• Cellphone: $100

• Eating out: $300

• Utilities: $250

• Clothing: $200

• Lunch and school expenses for kids: $200

Your total monthly expenses are $4,650. When you retire, though, you likely won't be paying for kids' school lunches. Your mortgage might be paid off, and your grocery bill will be lower once the kids are out of the house.

Another factor to keep in mind is that your spending will vary over the course of your retirement. If you retire at 65, you might want to go on that Alaskan cruise you've been dreaming of or take that trip to Italy. By 89, however, you're less likely to have the stamina or health to take long trips.

Calculate your true retirement income needs

So, if assuming you need 80% of your pre-retirement income for every year of retirement doesn't work (at least not for everyone), how do you determine how much to save?

Start by calculating your expected expenses in retirement, including housing, healthcare, food, and transportation. Add a bit more for those trips you want to take and to pay for hobbies. Then, subtract the amount of benefits you'll receive from Social Security and any pensions you might have. The amount left is how much you'll need.

Say your total expenses in retirement are $3,000 a month for your property taxes, food, car, and leisure activities. You sign into MySocialSecurity and see your expected benefits are $1,200 -- that means you only need $1,800 per month in retirement income from your own savings.

$1,800 times 12 months means you'll need $12,600 in annual retirement income. Add a bit extra in case Social Security benefits are reduced or you end up spending more than you expect and put your income needs at $15,000.

If you use the 4% withdrawal rule, that means you'll need $375,000 in retirement savings -- a far cry from $2 million. While your expenses might be different, your true retirement needs might be a lot less than you think.

The best time to start saving for retirement is yesterday, the next best time is today

Saving for retirement takes time. The longer you save and invest, the less you'll have to save thanks to the power of compounding interest. If you haven't started saving yet, now is the time to start.

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