Many Americans fail to plan properly for their retirements. In some cases, they put paying monthly bills, home renovations and even planning a vacation ahead of saving for retirement.
Data from a 2010 Employee Benefit Research Institute study found that retirement finances for early baby boomers were at risk. Almost half of them didn’t have resources to pay for “basic retirement expenditures and uninsured health care costs.”
In a separate report, the institute found that estimating the amount of retirement savings you’ll need makes a difference. Workers who did so, calculated their nest egg should be at least one $1 million.
Which brings us to today’s Just Explain It.
What’s the best way to retire with $1.5 million in savings?
We asked Doug Wheat, a Certified Financial Planner at Family Wealth Management, to help us figure it all out.
Saving $1.5 million will provide a very comfortable nest egg for most professional couples in retirement, and here’s why.
Wheat says a safe initial withdrawal rate from an investment portfolio is 4% if you want to avoid running out of money during a 30-year retirement. Taking 4% of $1.5 million will give you $60,000 to add to your annual budget…and that’s not including your Social Security benefits.
But there are steps you need to take to reach your goal.
Number 1 – Start saving early and put away as much as you can. A worker in his 20s who takes advantage of compounding rates of growth has a good chance of reaching the $1.5 million mark.
Wheat says if you can afford it, contributing a $1,000 or more per month to your retirement plan will help you reach your goal. If not, saving 10% of your income a month is reasonable…assuming the growth rate is about 6%.
Number 2 – Have contributions to your retirement plan withdrawn directly from your paycheck. The funds can be deposited into your 401(K) or 403(B) plan…and some employers even match your contributions.
Wheat suggests donating to an Individual Retirement Account, or IRA, if you don’t have access to a retirement plan at work. The drawback is that individuals under 50 can only contribute $5,500 a year to the account.
Number 3 – Stay focused on saving for your retirement. Buying a home, a car or paying for your kid’s college education will compete with saving for retirement. Wheat says, “steadily setting aside money in retirement accounts, in good times and bad, is the best way to ensure you don’t have regrets when you want to retire.”
The bottom line is your golden years should be important to you. How well you plan can be the difference between living comfortably or running out of money.
Did you learn something? Do you have a topic you’d like explained? Give us your feedback in the comments below or on Twitter using #justexplainit.