How much will it take to retire? That’s the million dollar question. Or, depending on your view of what constitutes retirement, it may be the two, three, four or five million dollar question. Sadly, a lot of Americans have simply stopped asking this question altogether as the “retirement” they envisioned for themselves seems more like a fantasy than a realistic goal.
So, why is there so much anxiety these days about not having enough money for your golden years? Longer life spans, the rising cost of living (particularly for healthcare and children’s education), slow growth in real wages, inadequate savings, low interest rates, and diminishing faith in the Social Security system have all played a role in Americans’ growing retirement angst.
While the traditional “fully retire by 65” retirement that your grandparents and parents may have experienced may not be in your future, a close variation of that retirement may still be attainable. However, you will need to set some reasonable savings goals, be disciplined about attaining them, as well as position yourself for the uncertainties you will likely encounter along the way.
Unfortunately, the process of figuring out how much money you need to retire is not a simple exercise. Getting a close approximation for something that is decades in the future will involve making a variety of assumptions about factors like your life expectancy, the quality of your health, the rate of inflation, interest rates, market performance, and tax rates will ultimately play a significant role in determining how much money you will need. As former Secretary of Defense, Donald Rumsfeld, once famously said, there are a lot of “known unknowns.” We know we are going to die one day, we just do not know when. We also know that our cost of living will likely go up over time, but we don’t know by exactly how much. The same can be said about taxes, market performance, etc.
Whenever there is a lot of uncertainty, it is best to plan to use reasonable assumptions, but plan for many different outcomes; thereby giving yourself flexibility to adjust to your changing circumstances.
Time is on Your Side
One of the most significant determinants of how much you need for retirement is how long you will live. The good news is that, these days, living into your 80’s and well beyond is becoming more of the norm than the exception thanks to healthier living and advances in medical science. The bad news is that, unlike your grandparents who had to save enough to last fifteen years, your money will likely have to last you an extra decade or two. In fact, depending on how early you retire, your retirement period could be as long as or perhaps longer than your working career.
While most of us may not care to know the day that we are going to expire, the Social Security Administration does. According to their statistics, if we live to age 65 our odds of living another twenty years or more are actually pretty good.
- A man reaching age 65 today can expect to live, on average, until age 84.3.
- A woman turning age 65 today can expect to live, on average, until age 86.6.
Unfortunately, given longer life spans, making your money last as long as you do is becoming an increasingly challenging objective, especially given the current low interest rate environment.
8 Tips to a Financially Secure Retirement
Unless you win the lottery or have a significant inheritance you can count on coming your way, getting to a financially secure retirement doesn’t come overnight. In fact, it can take decades of doing many things right.
Here are some useful tips to help increase your probability of achieving long term success:
- Set Realistic Goals – A good retirement plan should be rooted in somewhat reasonable assumptions. Planning to retire with $10 million in your pocket at age 65 may sound great on paper, but you have to have a sound, realistic path to get there. Saving 10%-15% of your income each year and adjusting your lifestyle appropriately is a good start to providing for a financially secure retirement (even if it doesn’t get you to $10 million).
- Systematically Save – Just like automated salary contributions to your 401k, systematically contributing set dollar amounts to other savings and investment accounts (i.e. 529 accounts, brokerage, etc.) will help alleviate the temptation to spend your money now and keep you on track to attain your longer term goals.
- Maximize the Match – Do whatever you can to at least maximize your employers’ matching contribution to your retirement plan. Free money and 100% returns are hard to come by!
- Utilize a variety of Savings Vehicles – Taxes take a large bite out of earnings over time. Since we don’t know what future tax rates and tax policy will be it makes sense to not put all our retirement eggs in one basket. If all your retirement funds are in a pre-tax retirement (i.e. Pre-tax 401k) when you are in retirement, you will not have any choice but to take funds from that vehicle when you need funds. All funds taken from a pre-tax retirement account are considered ordinary income the year they are withdrawn which may increase your marginal tax rate. Having various pools of funds to draw from will give you additional flexibility to reduce your overall tax burden.
- Stick with your Investment Plan – Markets are volatile and reacting to short term market movements or attempting to “time” the market can do more damage than good over the long run.
- Keep a Cash Reserve – Keeping ample funds in a highly liquid account for unexpected contingencies will help enable you to stick with your plans and maintain your lifestyle when adversity strikes.
- Reduce Debt and Build Home Equity – Entering retirement with very manageable fixed overhead will give you the ability to adjust your discretionary spending if necessary. If your investment returns are less than expected or you incur higher than expected living expenses (i.e. medical bills, utilities, insurance costs, etc.) will erode your spending ability. Having your major household expenses (i.e. car and house) defined and unencumbered by loans will give you greater flexibility if you need to cut back in other more discretionary areas.
- Maintain Ability to Earn a Buck – Finally, the ultimate way to guard against a variety of uncertainties is to not fully retire. The trend towards the “gig economy” where having temporary employment engagements and contract work is becoming more commonplace. If you are able to earn some income during retirement while maintaining your ability to have a leisure lifestyle, that would be a very desirable situation. To do so, you need to keep your credentials, skill set fresh, and network.
While these tips can help get you to where you want to be, doing a periodic check-up of your progress along the way can also be a useful exercise. There are many simple retirement calculators as well as more complex financial planning software (at SMS we use MoneyGuide Pro) that create customized retirement projections. The goal is to make sure you are headed in the right direction.