Retirement Savings 101
Whether you want to travel the world or relax in your own backyard, saving now for a comfortable retirement is an important part of overall financial wellness. Learn how creating a vision for retirement and enrolling, or increasing contributions in the employer sponsored retirement plan can help you achieve retirement dreams.
“Do not save what is left after spending; instead spend what is left after saving.”
– Warren Buffett
Whether your retirement plans include traveling the world, sending your grandchildren to college or donating to your favorite charities, clearly identifying your objectives can mean the difference between a successful retirement and falling short of your goals.
Key considerations should include where you’re going to live, if you’ll have a part-time job and what your expenses will be. Other factors to consider are items such as your current savings, inflation and Social Security.
Take Inventory of Your Finances
An important first step in planning is to figure out where you currently stand financially. Evaluate your budget to determine where your money is going and what money you’ll have coming in during retirement.
Look to your employer-sponsored retirement accounts, individual retirement accounts and, for some, wages and a pension. Be sure you’re thinking of income in post-tax dollars, as many retirees fail to factor in taxes.
Then prioritize where you should (or want to) be spending your money. Now’s a great time to create a “bucket list” of all the things you’ve dreamed about doing if only you had more time, as well as the lifestyle you want to live in retirement.
Compare Pre- and Post-Retirement Budgets
See how your pre- and post-retirement budgets compare. The more realistic you are, the better prepared you can be. Try to be realistic in terms of retirement length, too. According to the Social Security Administration, one out of every three 65-year-olds today will live past age 90 and one out of 7 will live past age 95.1
If you need to save more to make your post-retirement budget stack up, a little extra can go a long way. For example, a one percentage point 401(k) contribution increase for someone earning $50,000 annually would translate to a pay reduction of only $9.61 a week.
[And make sure you’re contributing enough in your 401(k) to get your full company match. Otherwise you’re leaving free money on the table.]
If you’re expecting Social Security to be a primary source of your retirement income, consider this:
The average monthly Social Security benefit in July 2018 was $1,414.2 That means a single person would earn an annual income of $16,968 and a couple could earn $33,936.
Consult a Financial Professional
There are several formulas to decide how much you should save. Many financial planners recommend that you save 10 to 15 percent of your income (including employer contributions) for retirement, if you start saving in your 20s.3 Others say you’ll need at least $1 million to retire comfortably.
One easy-to-use formula is the 4 Percent Rule of Thumb. It seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing through retirement. This formula helps you determine the amount you will need to have saved to generate the retirement income you want by dividing your desired annual retirement income by 4 percent.
For example, if you want to generate $80,000 per year, your retirement nest egg would need to be about $2 million. This assumes a 5 percent return on investments (after taxes and inflation), no additional retirement income (i.e., Social Security) and a lifestyle similar to the one you would be living at the time you retire.4*
No matter which benchmark you use, a trusted financial professional can help you vet your plan and determine an appropriate strategy so your savings align with the life you envision in retirement.
1 https://www.ssa.gov/pubs/EN-05-10147.pdf – January 2018
2 This information is as of August 2018. The benefit amount is updated on a monthly basis. The current average monthly Social Security benefit can be found in Table 2, line item “Retired workers”, by navigating to the following link: https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/index.html
3 CNN Money – Ultimate Guide to Retirement: How much should I save? https://money.cnn.com/retirement/guide/basics_basics.moneymag/index7.htm
4 https://www.investopedia.com/retirement/how-much-you-should-have-saved-age/ – January 2018
*For informational purposes only. It is not intended to provide any legal or financial advice. Consult with your advisor regarding your particular set of facts and circumstances.