11/8/2013 4:45 PM ET|
4 ways to get your retirement number
There are many paths to retirement, and which path you take hinges on many factors. Make sure you reach your golden years with a financial plan.
When it comes to retirement planning, most of us are consumed by figuring out “the number” – that elusive savings goal we aim to hit by age 65, or there about.
Figuring out how much to save for retirement can be confusing, to say the least. You’ve got to factor in your current income, your retirement lifestyle expectations, inflation, income growth, returns and possible Social Security checks. To complicate matters, different financial planners and accountants recommend different calculations to find “the number.”
Each calculation approach has its own pros and cons, and each will probably lead you to a different retirement goal. It’s up to you to decide which approach or combination of approaches works best for your needs so that you can calculate your own retirement plan.
Keep in mind that there are top-down and bottom-up approaches to retirement goals. The top-down approach attempts to determine how big your nest egg will need to be at retirement, such as 25 times your annual expenses. The bottom-up approach seeks to determine how much you’ll need to save each year to reach your goals, perhaps 15 percent of your salary.
Think about lifestyle first
Most retirement calculations assume you’ll want to live a similar lifestyle to the one you’re currently in once you retire. But because you’ll generally have fewer expenses, like payroll taxes, work expenses and (hopefully) debt payments, you probably won’t need to withdraw 100 percent of your current income during your retirement years.
The U.S. Department of Labor estimates that most retirees need about 70 percent of their pre-retirement income during retirement, though lower-income earners may need 90 percent or more of pre-retirement income. If you plan to travel and live it up, you’ll need more, but if you plan to live a quiet, simple life at home, you may get by easily on less.
The point is that each of these approaches hinges on the question of what kind of lifestyle you want to lead in retirement, as this will have a huge impact on how much you need to save.
No. 1: The 'quick and dirty' approach
The “quick and dirty” approach described in this Kiplinger article is a very basic way of planning for retirement. Even though it’s pretty simple, this approach can actually help you set realistic goals and motivate you to work towards them.
These formulas generally take Social Security into account, and make some basic assumptions that your salary will rise faster than the rate of inflation and your retirement accounts will meet basic return-on-investment thresholds, usually of around 5 or 6 percent.
Generally, these formulas simply set a savings goal based on saving anywhere from seven to 20 times your current annual salary. A benchmark of 11 times your salary is a commonly used estimate within this range.
No. 2: Safe savings rates
Recently, an associate professor at the National Graduate Institute for Policy Studies in Tokyo, Japan, Wade Pfau, proposed an interesting new theory for calculating retirement savings. While most other methods focus on minimum withdraw rates during retirement, the safe savings rates method focuses more on how much, at a minimum, you should save for retirement.
Pfau suggests creating savings guidelines that are based on historical data about the stock market. According to his article in the Journal of Financial Planning, this method treats “the number” and withdrawal rates “as almost an afterthought.” Instead of focusing on meeting a particular end goal, you focus on following a strict savings plan. Pfau’s tables can give you an idea of what percentage of income to save for retirement, based on your age.
No. 3: Age-based goals
Age-based retirement savings goals do focus on the end number, but this method of calculation actually gives you several smaller numbers along the way. These benchmarks help you see if you’re on track for retirement savings, or if you need to ramp up your savings to hit your final goal in time.
Age-based benchmarks are often based on either a very complicated retirement goal calculation or on a “quick and dirty” calculation like the ones outlined above. One popular age-based goal list is from Fidelity Investments and suggests benchmarks like saving your annual income by 30, 3 times your annual income by 45 and 6 times your annual income by 60. Like end-goal quick calculations, this formula from Fidelity has some built-in assumptions, like having a 401k plan, retiring at 67, portfolio growth of 5.5 percent and no breaks in employment or saving.
No. 4: Complex retirement calculators
The above three options for finding your retirement number are relatively simple and straightforward. This isn’t necessarily a bad thing, but many of us would prefer a little more detail. In this case, there are a plethora of complicated retirement calculators that take everything from income goals to Social Security checks to inflation to annual interest into account before setting a retirement goal.
This article from Fox Business shows one possible way of calculating your number. The article’s author asserts that the math isn’t that hard (though it still doesn’t take all the details into account), but it’s still more complicated than most of us can handle on our own.
No option is perfect
Most financial planners will tell you that figuring out a retirement goal is more art than science. In the end, you’re really just making an educated guess, since none of us knows exactly what the market will look like in ten months, let alone ten or more years.
When you’re covering decades’ worth of financial information and assumptions with a single calculation, expect things to get a little messy. But don’t let that discourage you. Instead, let it motivate you to save as much as you can, so that you’ll be secure during your golden years.
More from U.S. News & World Report:
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Here are some of the responses that we generally get on the money board concerning retirement. The most asinine is usually why is msn blah, blah… I assume many if not most are from people that are young starting out and have little knowledge about investing. Many others are purely antagonistic, ignorant political babble from individual whose educational background mirrors their writing.
This is America, it is still the land of opportunity and you are in charge of your future. The government will only give you minimal help and then only if you reached a level close to starvation. Assume the candidate of your choice is elected president in a few years. How will that affect you personally? It will not, you will still be in the same position that you currently occupy unless you make changes in the things that you control.
This country is so great that if you place me here as a teenager from a foreign country without speaking one word of English, by the time I’m sixty I will be a multi-millionaire. I will only take advantage of the educational help from the government after serving in a war zone. Paying my taxes, speaking the language without bilingual education without an accent. I will not use student loans and will have a college degree in a field that is in demand.
It is never to late, all it takes is the will, a dream and a plan. On the other hand you can sit on your a## complain and be average at best.
Happy Veterans Day.
Forget the calculator. I just save as much as I can.
Ask yourself. When's the last time you heard a retired person complain,"Dang! I went and saved too much for retirement!"?
When was the last time to talked to your grandparents and found that they were running around spending money the way they did when they were young.
More likely they present a quiet life style. The house is paid for, The car is paid for, the furniture is paid for etc. Given this scenario it is much more likely that you would need approximately 25% of your current yearly income x 5 to retire. This of course assumes that Social Security remains available.
I am of the opinion that these articles are designed to scare people into risking their money at the biggest gambling casino's in the world the NYSE and NASDAQ. Just think of all the money made by these firms convincing you that they should give them a portion of your money just so you can gamble with them.
Remember 2008 people, the big guys walked away richer than ever and the lowly 401k was decimated.
Eliminate debt and increase savings, where possible, while maintaining a realistic perspective on what your lifestyle will REALLY be for those very short 8 years.
Most people cant fathom a healthy retirement fund because they can't do the simple things now. Most people have credit card debt, pay the minimum and spend more then they make. Then they get on these forums bad mouthing the people who write these articles. Maybe these people should start reading the budgeting forums first. These articles are very helpful and should guide you in the right direction towards retirement. Compounding Interest is a beautiful thing, start saving in your early 20's and don't look back. Avoid credit card debt at an early age and you wont spend all of your 30's paying for mistakes in your 20's. This will allow for a comfortable nest egg at retirement.
“Is it better to be safe, than sorry?” Retirement is not about a number. It’s about finishing what you missed in your youth. Your physical clock is ticking and only when you retire do you realize that time is passing by exponentially faster than when you were occupied with work. * Reassess-Relocate-Reinvent * Safety is a myth. Sorry is real.
Savings as much as you can isn't the issue. Unexpected expenses are the issue and how do you plan for them? Who would have thought that the three legged stool of retirement, envisioned by FDR, would be so deformed now that the Boomer generation is on the verge of retirement.
That three legged stool was 1) Social Security and Medicare, mandated by the gov't, collected by those working, based on their income, and invested wisely by the gov't for them so that it could be paid out to them when they were to retire at 65. Of course, the actuaries told the politicians that they would probably be dead at 67 but Ponzi scheme such as it was, it seemed to make sense. 2) pension plans or 401ks or some vehicle whereby your employer would help finance your retirement, also to be invested wisely so that it could grow 3) Your own savings, also, invested wisely. Add the three together, the gov't, the employer, and you. Now, how well has that scenario worked out?
So, back to the drawing board. People are living to 90! They are not saving and investing wisely. Fewer and fewer of them are working, the lowest labor participation rate for forty years! and it may be structural no less, but whatever, for this exercise. Enter, ObamaCare, a multi purpose plan to gain votes, provide money for the gov't to spend, pay for the reduced retirement and medical benefits for the elderly and poor which is growing to encompass a larger and larger piece of the economy, force the young to pay into the system, which they assume they will not use and leave a grand legacy for the president and the progressive dream. Now, how's that working out?
And, how much did you say we should save assuming prices will be just a little higher in 30 some odd years or so?
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