Many surveys say that Americans aren't saving enough for retirement. But how much is enough? There are theories and strategies to calculate the size of the nest egg you'll need for your golden years. But then life happens, and in life there are unknown variables and unexpected events that can throw a wrench into even the best-laid plans. Still, it’s better to have a plan, rather than to fly blindly into the sunset.
Crunching the Numbers
One popular rule of thumb is that you'll need to have saved 10 times your final annual salary by the time you are 67. So, for example, if you expect to pull in $85,000 in your final year, that would make your magic number $850,000.
Another way to calculate this ultimate goal is to look at current living expenses—annual or monthly—and assume that, in retirement, you will incur about 80% of those expenses.
Some retirement planning professionals suggest using “the 4% rule” to determine how much retirees can withdraw from their retirement account each year in order to provide a continuing income stream. Using the 4% rule, according to Jonathan Blumenthal, CFP®, managing director at United Capital, one million dollars of assets can reasonably sustain a $40,000 per annum withdrawal rate.
Make a Plan
The first step is to establish your number and make a plan. You may be more likely to achieve a goal if you have a specific number in mind, which can help keep you on track along the way. Plus, it will give you a target against which you can measure progress.
Sock away as much as you can. "Preferably start young and save a reasonable percentage of your income. Early savers can begin at 10%, while mid-life-beginning savers may need to consider 25% or more and increase contribution amounts as income rises," Blumenthal says.
Then investors need to "allocate, rebalance, and let time work its magic. With a long-term time frame, let it alone. Diversify your assets, which means not all assets will increase or decrease at the same time. You will need assets that are non-correlated with the investment markets to do well in this area," Blumenthal says.
Others discuss different approaches, like stock-heavy portfolios in younger years that are reallocated to bonds and cash later in life such that, by retirement, your portfolio's objectives have shifted from growth to income, and with a lower risk profile. This is the classic "wealth accumulation" shifting to "wealth preservation." Of course, even in the later stages of this approach, risks are still there. Still, many choose to reduce much of the stock market related risks, and give up the stock markets potential returns, as they near retirement.
Expect the Unexpected
Life can—and probably will—throw some unexpected boulders in your path. Actual costs of health care in retirement remain an unknown. But a recent study by retirement planning advisory HealthView Services estimates that a 65-year-old, healthy couple can expect to spend about $260,000 on Medicare premiums over the course of their retirement .
Other possible setbacks include late-career job loss, which may result in working a shorter time than expected and thus provide you with less retirement assets than you expected, Blumenthal says. Or, a large one-time expense in retirement could wreak havoc with your cash flow.
Some people require a leave of absence from the workforce to care for a loved one who has fallen ill, or must care for an elderly parent. The escalating cost of college tuition is another cost that can vary widely from family to family.
One solution could be part-time employment later in life. "It may become not only a financial necessity, but also a mental and emotional benefit. Like it or not, jobs provide people with social connections and the active use of their largest muscle—the brain," Blumenthal says.
People do not necessarily fail or succeed in their retirement goals because of the market.
People fail or succeed based on the decisions they make, Blumenthal says. "Having a financial planning process that will allow people to evaluate how the changes in their life, and the changes in their resources, impact their decisions will allow them to make the necessary trade-offs to stay on course and meet their goals."
But you cannot pursue your goals until you have set them.
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