Retirement may feel like it is a long time away, but as with all of life it will be here faster than you know. I always find it amazing how the days, weeks and years tend to all blend together and fly by!
We all know that we need to be saving for retirement, but there are other items that you need to consider also when making our investment decisions. These factors can have a big impact on how much we save, how long we need to work and how much we can do in retirement.
How to Figure Out How Much You Need In Retirement
- Yearly Income – Most planners will recommend targeting a percentage of your income. I recommend instead you should focus more on how much it actually costs you to live. If you will continue to spend $50,000 after retirement it makes no sense to plan on $40,000 because of a random percentage that is too general. Know your expenses as they vary from your income. Some research that I have read has actually indicated that you need 120% of your income during retirement (especially once you start factoring in medical costs, the fact we live longer and seem to be healthier during retirement).
- What percentage of your nest egg can you access each year? Most advisers will tell you that between 4 – 8 % is a good target. This comes from the some more generalized numbers that include average inflation of about 4% a year and growth in stocks of about 12%. Thus allowing your nest egg to remain fairly un-depleted as you can keep up with inflation and the market will continue to increase or replace your funds. This is a tough one to make a big generalization. Why? Because everyone has a different risk tolerance, spending needs and it assumes that you get the same return each year, which never happens! Plus that 12% number for return has been knocked down over the past few decades. You may want to pick a base line number, such as I will spend 4% of my nest egg a year and but then be prepared to adjust on a yearly basis depending on what the market is doing, and what your needs are. (For more on the 4% rule)
- Retirement age will have a big impact on how much money you have at retirement. Why? The longer you wait the more you can invest, the bigger your social security amount will be and the more time you have to grow your money. Remember our retirement ages were set when our life span was shorter. If you can work and you enjoy your work keep going past the 62 – 65 time window of retirement age. This will greatly increase how much you will have in retirement and how much you are required to save. What if you don’t enjoy your work, but still want to keep saving and working? Redefine what retirement is; rename it to your enjoyment years. Take a less stressful job (that non-profit really could use your skills), work part time, start a new career (consulting with the old company?) just keep some income coming in and allow your nest egg to keep growing! (Learn the difference between retirement and financial independence.)
- How much should I have in my nest egg? Yet again, not an easy one to generalize. The ongoing advice is one – three million dollars. Yet it is hard to generalize a random number for everyone. Why? Because of the two issues we have all ready discussed. First how much do you need in retirement. Not the guy down the street or the couple next door – but how much do you need. This will determine what your nest egg needs to be. Second, when are you going to retire? You will need less the longer you work and have earned money coming in.
Hopefully now your brain is thinking about your retirement and what it will require from you! Don’t wait to tackle your retirement savings, get going now and you will be happy in retirement.
Need more personalized help? Check out our Financial Coaching, where we cover your goals, where you are now and how to get to where you want to go with your life – not generic numbers.