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Client Log InAre You Saving Enough Money For Retirement?
Saving for retirement is an important issue that makes more than a few people uncomfortable. For many individuals, retirement feels like a long way off and the process of saving for it feels almost unnecessary.
Who wants to save for retirement when you’re in your early twenties and doing other things with your money? Sounds pretty boring to a young person. For others who are a little older, as retirement edges closer, anxiety can develop resulting from a lack of savings that leads to a feeling of dread.
No one wants to grow older, behind the eight ball, with the fear that they may not have enough saved for retirement and may have to work for the rest of their life. Or worse. What if there’s not enough money toward the end of life to afford proper medical care? So, what is the right amount to save for retirement? Let’s take a closer look.
Two Common Approaches to Saving for Retirement
There are two benchmarks to consider when saving for retirement. The first is your current level of annual income, the second is your current level of annual spending. Neither are fixed – especially income, which will be lower during the earlier stages of a career and then subsequently increase. For some, the increases continue unabated.
For others, a plateau sets in and a predictable level of earnings becomes the norm. For career changers, there can be a “reset button” of sorts that involves starting over at a lower income level. The point is, annual income levels are prone to fluctuate throughout a career and lifetime.
Therefore, though there is a rule of thumb to save enough so that you can retire and live on 70%-85% of your current annual income in perpetuity throughout retirement, this heuristic is somewhat flawed. If we only really have an accurate view of our career income through the rear-view mirror, how do we accurately measure 70%-85% of it? And for how many retirement years are we supposed to live at that 70%-85% measure?
Know Your Annual Expenses
Saving for retirement based on your level of annual expenses is a second approach that can be more reasonable than basing retirement savings on income level. The reason for this is that expenses tend to stay somewhat steady throughout an adult lifetime as a certain level of lifestyle becomes the natural norm with minimal fluctuation.
Though some expenses will fade and become replaced by new ones in older age, it is not unreasonable to expect that from a behavioral standpoint, an accustomed level of expenses will remain mostly consistent into later years. A home mortgage may become fully paid off, but medical expenses may arise.
Children may leave the nest, but a little more money may go to travel and hobbies. Get a handle as to what your average annual expense level has been over the past five years and use this as a rule of thumb.
Multiply the figure by 25, (if you’re thinking in terms of a 25-year retirement), and this becomes your target retirement nest egg level. Maybe you plan on working longer and are pursuing a 10-20 year retirement. Whatever the duration, use the appropriate multiplier
What's Your Number?
For many, the targeted amount for retirement savings can approach $1 million or more. This can feel quite daunting, but the key to retirement savings is to start early and be consistent.
Even if you start later, the key is to be consistent. It’s not always easy to sock away $500 a month toward retirement, but even for someone starting at age 32, that consistent $500 monthly contribution can become $829,000 by age 67 (assuming annual compounding returns of 7% – the stock market averages 9% per year).
For someone starting at age 27, the extra five years leads to a nest egg of $1.2 million forty years later, at age 67. Not bad. Think in terms of your expense level – if it runs approximately $40,000 per year, a 25 year retirement will require approximately one million dollars.
Clearly, finding the opportunity to contribute $500 per month can make a world of difference later. Remember, many employers offer matching 401k contributions, so this can make hitting that $500 monthly goal far easier.
What if I'm Behind In Saving For Retirement?
If you’re behind, the best thing to do is to find ways to contribute without assuming undue risk with your investments. Look for opportunities to increase your earnings potential, decrease your expenses, and target low-risk index funds that can compound over time along with safer stocks and bonds. Additionally, ponder what retirement actually means to you.
The myth that has been sold to American culture involves some sort of imagery that includes paradise- palm trees, hammocks, golfing, cruises, and generally lounging around. Well, guess what – maybe relaxing on the beach would be nice for a little while, but if you’ve lived an active adult life, your personality isn’t likely to transform overnight. For some, the prospect of retirement itself is daunting – the associated meaninglessness and diminished purpose in day-to-day life can actually be a killer.
Maintaining an active, interesting lifestyle while living off savings, cutting costs and staying healthy is the real goal. If you’re behind in your retirement savings plan think about pursuing a part-time career that could add meaning – and life – to your later days.
About The Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.