retirement
A view of the dining room at the Motion Picture Television Fund Country House, a retirement community for members of the entertainment industry, May 16, 2016, in Woodland Hills, California, about 22 miles west of Hollywood. Getty Images

No one wants to spend their retirement bagging groceries, but without sufficient retirement savings, that's how you may be spending your golden years. The latest Merrill Lynch Finances in Retirement Survey, released in March 2017, revealed that the average cost of retirement has risen to $738,400. Of that number, $260,000 will go to healthcare costs alone, according to Fidelity's Retiree Health Care Cost Estimate. But $738,400 is just an average — retirees accustomed to high incomes may need even more than this to maintain their standard of living in retirement.

Retirement income

Most retirees can expect to see their expenses drop when they retire, hence the standard recommendation that retirees will need 70% to 80% of their pre-retirement income. However, the amount of income you'll need in retirement depends heavily on the kind of life you want to lead.

If you plan to settle down in your (paid off) home, living simply, then 70% of your current income is probably enough. On the other hand, if you want to live the high life in retirement, traveling around the world and generally indulging yourself, you'll need a lot more than 70% of your pre-retirement income to have the retirement you want. And if you want to leave substantial assets to your family, you'll need to set aside extra savings for them.

That's why it's important to start thinking about what you want to do in retirement long before you're ready to retire. After all, the earlier you start saving, the better.

Yet how can you develop a savings plan if you don't know how much you'll need? Of course, your retirement plan can, and probably will, change over time, but at least you'll have a rough idea of how much you'll need, and you'll be able to start saving sooner rather than later. Keep an eye on your annual Social Security statement as well; those benefits can provide a significant boost to your retirement income.

Retirement priorities

The Merrill Lynch survey identified seven key life priorities: family, health, home, work, leisure, giving, and finances. Consider how you'd rank these seven priorities for yourself; deciding on your top two or three life priorities can help you to determine just how much you really need to save for retirement. Is family the most important thing in your life? Then you'll probably want to spend a lot of time with your family, so you'll want to live near them.

If giving is a top priority, you may want to put a lot of time and energy into volunteering for your favorite causes during your retirement years. If you enjoy working, you may want to consider working at least part-time after you retire — in which case, you can factor in the money you'll earn from that job when calculating your income needs. And if health is a big concern for you, you may want to set aside extra money for expenses, such as long-term care insurance and treatment for your existing health conditions.

Retirement expenses

Coming up with a realistic list of retirement expenses early on in the planning process can help you to determine how much you need to save. If you're not sure how to come up with a realistic retirement budget, start by plugging in the average expenses in retirement. Most of your day-to-day expenses will decline or disappear once you retire. For example, you'll no longer need to commute to work every day, so your auto expenses will probably go down quite a bit. In fact, if you live in an area with good public transportation, you may be able to get rid of your car. And if your house is paid off by the time you retire, you won't have a monthly housing payment to worry about.

However, healthcare is one expense that tends to rise throughout your retirement. As we get older, we need more and more medical help to stay healthy — and that medical help costs money.

The $260,000 finding from Fidelity's study assumes that you'll have traditional Medicare coverage — and includes the cost of premiums — but doesn't include long-term care expenses, which are not covered by Medicare. The Fidelity study estimated that a 65-year-old couple would need an additional $130,000 for long-term care insurance, assuming the couple is in good health.

Retirement savings

All of this may sound daunting, but remember that you don't need to actually save $738,400 to have that much money by the time you retire. You just need to save enough so that it can grow to the amount you need by the time you hit retirement age.

For example, let's say you're 30 years old and plan to retire at age 70. That gives you 40 years to save, and you can reasonably assume your investments will enjoy a 7% rate of return per year. If you plug those numbers into a savings calculator, you'll find that saving $5,463 per year will get you to a balance of $738,400 by the time you hit age 70. That's just over $455 per month.

If you're earning $50,000 per year, tucking 11% of your pre-tax income into a tax-deferred retirement savings account would do the trick. And remember, that $738,400 number is just an average. Your choices and your priorities will determine how much money you truly need to support the retirement you want.

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