Everyone knows that starting to save early in your career is the key to a successful retirement. There’s no question that the time value of money and compounding interest are two powerful forces to building a successful retirement account. But, what happens when you get there? How much do you need to achieve your dream retirement?
Retirement has been compared to running a marathon. The only difference is, you don’t know how many miles you’re going to run. People are living longer and more prosperous lives in their later years, and a retirement that lasts 10 or even 20 years past what you planned for will require hundreds of thousands more in savings. A survey by the Society of Actuaries found that 50% of retirees underestimate their actual life span by nearly 5 years. Unless you want to spend those remaining five years watching daytime TV and eating applesauce, this is not the kind of mindset you can afford to have.
The best approach to retirement starts with a realistic assessment of your lifespan. Estimate how many years you think you’ll have left, and add another 5-10 years just to be safe. Then put a strategy in place that helps prepare you for the long run. Ask yourself: What kind of lifestyle do I want? What sort of place would I like to retire in? What kind of home do I want? How much do I want to leave behind for my family (if any)?
Until you can honestly answer those questions, it’s tough to gauge how big your nest egg needs to be to live comfortably. Relying on a million dollars in savings for retirement is becoming unrealistic. It’s been said that 60’s are the new 40’s, and $3 million is the new $1 million. A rule of thumb is to put away at least 12 times your salary by the time you stop working. That rule also says higher earners should plan for 15+ times their ending salary, because Social Security will make up a much smaller fraction of their income. But, these benchmarks won’t meet the withdrawal rates cited below, nor will they likely leave anything for your heirs. Remember, though an accepted rule of thumb is to plan for 80% of spending in retirement years, that doesn’t factor in more travel, entertainment or other “free time” spending you will incur.
Now, about withdrawal rate. It’s often been said that you should plan to withdraw 5% of your savings each year to preserve your investments to last a lifetime. More recently, with returns as low as they are, that was reduced to 4%. But, that doesn’t consider an active lifestyle in the early years of retirement and reduced lifestyle spending in later years. Nor does it factor in potential medical costs as we age. A tiered strategy may make sense for each decade, beginning in your early 60’s. And, some advisors recommend annuities for part of your retirement portfolio to ensure a fixed income.
Even the most prudent and shrewd investors need help planning for their retirement. It’s important to forge a meaningful relationship with a financial advisor you can trust to lead you in the right direction. Discuss your specific circumstances, concerns and tolerance for risk. And most importantly, when the time comes to take the big plunge into retirement, don’t stress. If you’ve planned adequately, you can explore new hobbies, seek out your passions, and enjoy your newfound freedoms.