So you are now 65 years old and you've worked your whole life and are ready to retire. Retirement is not the end of life, but the end of a work era where you can finally relax and enjoy the life you've worked to have. You are now eligible to collect social security and if you've done everything right up to this point, including paid off your mortgage, have no debts at all, you could probably live off your social security benefits and mostly be fine.
The age at which you can start collecting from your retirement accounts, such as your 401k or IRA, however, is 59 1/2, which is still a young age to do a lot in your life, especially if you want to travel or take luxury vacations and cruises. You would ideally want to retire around 59 1/2 so that means you need to create enough of earnings for the wage gap between 59 1/2 to 62 1/2 or 66 1/2 years old, which means that you should have put away the salary and expenses you would have for 3 to 7 years during your sabbatical.
How can you determine how much you'll need to put away? This depends on multiple factors including how much your life cost you during your working years, what bills you foresee yourself having, and any child expenses you may still have, such as student loan debt, if you chose to help your children. Figure out how much it costs to live now. If you like to go out to restaurants, that is a factor that is unlikely to discontinue, as you'll maybe cook at home less, and enjoy food outside the home more.
If you are only going on a single vacation once per year, you'll want to factor in at least two or three per year during your retirement. If your grocery shopping costs you around $400 a month for you and your spouse, then you will likely be cutting that in half if you are going out more. You must also take into consideration that prices will inevitably go up, so that $17.99 steak meal you enjoy so much will likely increase to above $20 by the time you hit your retirement.
We also must take into consideration the biggest factor of where the majority of your money is going to go after you hit a certain age: your healthcare and your health insurance. Medicaid and Medicare will only help out if you are below a certain amount. If you have too much money in the bank, any government care will not kick in until your account is below $2,500. There are plenty of legal loopholes around this that we will not get into during this article, but talk about at a later date. However, if you want the best care, especially if you live in the United States, you will be paying for it with help from your health insurance company.
So now lets imagine a conversation that needs to happen: your 65 year old self and your 35 year old self are talking and your 65 year old self is asking you to put away money for them. You agree but not on an exact number. Your 65 year old self won't tell you exactly how much but says, "just put away a number that you think will make me comfortable." The exact amount is up to you. But for now, we'll assume that at 35 years old, you are comfortable in your career, with a family and children. This does not leave you much room to put away for your $65 year old self. However, if you've ever observed the aging process, you will learn the very obvious: as we age, we become more childlike.
Let us assume your salary is around $55,000 to $70,000. As stated in a previous article, that "extra money" is going towards an IRA or a 401k account. I can't begin to pretend I'll be able to calculate all of your bills, but the good thing about contributing toward a retirement account is that it is taken out of your paycheck before you even see the final number of your paycheck. If you are in the prime of your life with a family (spouse, children, and pets), making a reasonable salary, than aim to put away a minimum of 6% and a maximum of 12% of your paycheck. If you make about $2,000 per paycheck after taxes, that is anywhere between $120 to $240 or $240 and $480 per month, respectively.
Now coming back to the reality that you are now 65 years old: you've put away $240 or $480 per month for yourself throughout your 30s and 40s and possibly even your 50s, which is adds up to about $150,000 to $200,000 not counting all the vested growing interest. With the added benefit of social security and maybe a part-time "light work" job if you choose, you'll be making about $2,000 per month, give or take a few hundred dollars, thus continuing to have the "work benefit" that you put in during your 30s, 40s, and 50s. It is hard to imagine, but your 65+ year old selves are dependent on the hard working younger you. You are relying partially on the government as well, thanks to President Franklin D. Roosevelt who established social security benefits in 1935.
Since your younger self took care of your older selves in addition to receiving the money back that you already paid into the system, it's like a double salary of paying yourself to live comfortable, all because you decided to put away a percentage of your paycheck to help your older selves, taking into account the way you want to live and the cost of living. If you've lived like a regular human being on an average salary all of your life, the chances of you living like you're a millionaire when you are retired is unlikely. You may go out and buy an expensive car or take a very expensive vacation, but you are probably not going to purchase a mansion or anything like that, so don't forget to enjoy your life while you are still young as well!