As a financial planner, one of the most common questions I am asked is "How much money should I have saved?" or "How far behind am I in saving for retirement?" My answer? It depends.
There's no one size fits all solution when it comes to how much you should have stashed away for your retirement. What you need will differ from those around you. Here's how to track your progress toward saving for retirement:
What kind of retirement lifestyle do you want? Whether you're 25 or 45, thinking about the kind of life you want to live during your retirement years will help to set the stage for the kind of expenses you can expect. Perhaps traveling the world is important to you, or you want to donate to your favorite charities. Those activities will require a very different budget than keeping close to home and spending time with friends and family. Consider what hobbies you have or would like to pick up. By running some numbers that include your goals and hobbies, you will be able to determine the amount of income you will need to meet your desired lifestyle.
Will you have any debt? If you own a home or anticipate owning a home, you will be able to get by with a much smaller retirement budget if the house is paid off by the time you retire. Also consider whether you will own a car going into retirement or will have to continue to make payments as you acquire new ones. Heading into retirement with a debt load can significantly impact the amount of cash flow you will have available to meet other day-to-day needs. If possible, have a plan in place to hit the zero debt mark before you make the transition into retirement. Otherwise, be sure to factor debt payments into the amount of income you will need for retirement.
What income streams can you count on? You might be one of the lucky few who still has a pension to count on during retirement. Most of us will have some Social Security payments coming in. Some people also set up other sources of income such as a rental property. You will need to develop a plan to pull money from your portfolio and investments to support your lifestyle. You could also supplement distributions from investment accounts by working part time.
When do you want to retire? It's no secret that we're living longer. If your plan is to retire at 60 and you live until age 90, you will need to be able to support yourself for 30 years. Building a nest egg large enough to fully support yourself for a 30-year time period is very different from building a nest egg that needs to supplement part-time income for 10 years and fully support you for 20 years. Think about whether you are willing to continue to work part time or plan to cut ties with employment as soon as possible. If your desire is to retire as early as possible, you might need to adjust your lifestyle needs in order to make it work.
Where do you end up with the 4 percent rule? A general rule in personal finance is that in order to stay solvent throughout your retirement years, you should withdraw no more than 4 percent of your portfolio each year. For example, if you have $750,000 in a portfolio at retirement, you could withdraw $30,000. The question to ask is how far that $30,000 will get you. A great way to figure out the size of the portfolio you need is to determine what your retirement lifestyle will cost, factor in any debt you'll have payments on and subtract any additional income streams you can count on. From there, you can back into what you need to have invested in order to make that 4 percent equal to your annual expenses.
Your retirement goals will determine your savings needs. You can do it all, if you are willing to save up for it. Prioritize the things that are most important to you, and begin saving as early as possible to take advantage of compound interest.
Mary Beth Storjohann is the author of "Work Your Wealth" and the founder of Workable Wealth.
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