Do I Have Enough Saved For Retirement?
As investment advisors, some variation of the question “will I have enough money to retire?” is almost always asked to us in meetings with clients. Rightfully so because it is a VERY important question. People work their entire lives towards retirement, and the last thing they would want to happen is to run out of money during retirement.
So how does one go about determining how much money they need for retirement?
The answer to that important question is different for everybody. The difference comes in lifestyle choices and needs. It would make sense for a person used to a more upscale, lavish lifestyle to require more money to live comfortably in retirement.
One general “rule of thumb” you will find on the internet for figuring out your retirement number, is to calculate what your monthly expenses are, multiply that number by twelve to get your annual number, and figure out how many years you plan to be retired.
If you plan to be retired for 25 years, and you only have enough money for expenses for 20 of those years, it’s safe to say you need more money.
Another “rule of thumb” for people at the point of retirement is to estimate to withdraw 4% of your savings per year. Don’t forget about Social Security too! While Social Security can play a crucial role in some people’s retirement plans, it should not be even close to the only piece of your retirement puzzle. Banking on Social Security to keep you afloat in retirement is a risky game. Once again, if after doing the math, you out-live your money, it’s time to re-think your plan.
The key words in that last sentence are “your plan”. There are a million online retirement calculators that will help you determine a number to hit before retirement, but without a plan in place to practically achieve that number, what good is the number?
There is a common misconception about how to save enough money for retirement. Let me clear this up: if you’re banking on the stock market alone to get your retirement savings to where they need to be, you’re making a HUGE mistake. Investing can absolutely help a retirement account grow considerably over time, but it should not be the sole factor towards making your savings grow. In fact, for people nearing retirement in the next few years, investing your retirement savings in the stock market might not be the best idea.
Putting your money into safer, less risky investments would probably be the smartest course of action. After all, you wouldn’t want to lose some of your retirement savings being reckless in the stock market when you have little time left before retirement to make it back. If you have a long time horizon before retiring (10+ years), the stock market is a great asset in your “retirement savings arsenal”, but shouldn’t be your only weapon.
Wouldn’t it be great if you could make a lot of money now, put it under your mattress for years, and take it out at retirement and be just fine? Well, you could, but I’m not too sure you would be just fine. One thing to remember is INFLATION. A dollar today won’t be able to buy you the same amount of something in the future. Taking advantage of the stock market when you’re young is a great way to help reduce the impact of inflation over time.
One more thing about the stock market. When you count your returns on a year to year basis, I would recommend taking a look at your REAL returns as opposed to NOMINAL returns. Inflation, over time, can eat away at your returns, so it is always important to keep the real return of your investments in mind when planning for the future.
Participating in workplace retirement programs is an excellent way to boost your retirement savings. It sounds self-explanatory, but you would be surprised at how many people don’t contribute to their company plan. Setting up a direct deposit from each paycheck is a great way to discipline yourself into not accidentally spending your retirement savings. If you don’t see the money in your bank account, and it goes straight to your 401(k) at work, you won’t have the opportunity to spend that cash.
Cash flow is another HUGE factor in retirement. Not only do you need to figure out how much cash flow you’ll need during retirement, managing you cash flows properly now can SAVE you a lot of money for later in life. Any excess cash on a monthly basis could be better served socked away in a savings account, or personal IRA account for retirement.
The first check you should write each month is to YOURSELF. After determining your monthly expenses, putting the leftover cash away for retirement will add up over time. People have this misconception that money isn’t worth saving if it isn’t a substantial amount of money. Guess what? That little amount you DO save, will compound over the years and add up to quite a bit.
Saving for retirement seems like a daunting task that’s too far away to be on the forefront of any young person’s mind, but with a little financial planning NOW, you could be saving yourself a lot of stress down the road. Do your future self a favor, and start thinking about retirement TODAY.