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. 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).
- 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 fact that on average inflation is 4% a year and growth is 12% if you are in the stock market. 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 need and it assumes that you get the same return each year, which never happens! You may want to pick a base line number, such as I will spend 4% of my nest egg a year and anticipate an 8% growth on my stock investment but then be prepared to adjust on a yearly basis depending on what the market is doing, and what your needs are.
- 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!
- How much should I have in my nest egg? Yet again, not an easy one to generalize. The ongoing advice is one 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! After you have determined more precise numbers for you on what you will need, use the retirement calculator below to see how much you need to save. Don’t wait to tackle your retirement savings, get going now and you will be happy in retirement.
Additional information on investing for beginners can be found in this series: How to Invest Without a Planner.
Need more personalized help? Check out our Life Planning Coaching Program 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.
