Retirement is the goal, and finding the funds to make that happen is key. But how do you calculate the amount you’ll need for 20 or 30 years of retirement? What can you do to increase your savings right now? And what else do you need to consider when you first begin thinking about retirement?
Keep reading for tips and tricks that you can use now—and in the future—to secure your own retirement plans.
Pinpoint your current situation
The first step is to figure out your current income, savings, and debt—or more simply, your overall assets minus your liabilities. Getting a good handle on your current situation will help you know exactly where you stand. Then, you can figure out how much more income you’ll need to generate to meet your savings goal.
Don’t forget to include anticipated income sources like social security or pension income. These can add quite a bit to your retirement savings.
A simple calculation
According to Andrew Crowell, vice chairman of wealth management at D.A. Davidson & Co., the general rule is that whatever your lifestyle spending is today, plan on spending about three-quarters, or 80%, of that in retirement. “If a family is living on $10,000 a month today [or] $120,000 a year, [in retirement they are] probably going to [spend] a little bit closer to $8,000 a month because certain expenses, [such as] the amount [you’re spending on gas or] commuting to work, [will fall away],” he says. Because of this, creating a good estimate of your monthly expenses and keeping an eye on those costs is important.
Another common estimate that’s thrown around in the retirement planning community is the 4% rule, which suggests that you “can safely withdraw 4% of your retirement savings each year without depleting your principal over a 30-year retirement period,” says Bobby Mascia, CFBS, founder and CEO of Green Ridge Wealth Planning. “For example, if you need $50,000 per year [in retirement], you’d need a retirement portfolio of approximately $1,250,000 ($50,000 / 0.04).”
However, Mascia adds that the 4% rule can be limiting, so don’t take it too seriously. “Your safe withdrawal rate may vary based on your risk tolerance, investment strategy and current age, respective to how long you expect to live in retirement,” he says.
Think about where you want to be
The next part is the fun part—this is when you get to dream about your retirement plans. Do you want to take several extravagant trips each year, or would you rather purchase an RV and drive across the country? Will you downsize and move or keep your current home? Envision what you want to do later in life so you can start planning for it now, Crowell says.
Hopefully by the time you retire, your home will be paid off and your kids will be financially independent. Still, there may be additional expenses you hadn’t considered, such as the cost of healthcare, travel and daily leisure activities, explains Mascia.
“Things wear out, [and] there is deferred maintenance on homes and autos and things like that. So those are going to be ongoing expenses,” Crowell adds. “Do you want to help pay for your grandchildren’s education? That’s another outflow.” Make sure you take into account all these potential expenses so you don’t short-change the lifestyle you want to lead.
What you can do now
The sooner you’re able to save for retirement, the better, due to compounding interest and the growth of investments over time. Putting away $400 when you’re 20 years old will be much more beneficial than putting away $800 when you’re 40.
Still, there are many other ways to increase retirement savings, regardless of your age. For example, you can automate your savings, take advantage of catch-up contributions and cut back on unnecessary expenses, such as automated subscriptions you no longer use. Additionally, do your best to get rid of debt now, such as your mortgage, car payments or student loan payments. “Think about what you can pay down now so that in retirement, you don’t have that outflow any longer,” Crowell says.
Later life gigs
Another popular trend is working a side gig in retirement to earn additional income. “I’ve been [helping people plan for retirement] for almost 30 years, and the gig economy is real and people are using it in very creative ways,” Crowell says. “I have several retiree [clients] that have always been crafty people. [They enjoy] knitting, artwork [and] painting.” In retirement, these individuals sell those crafts on Etsy or at craft fairs. Others drive an Uber in retirement.
“People are realizing they can’t golf seven days a week or their body wears out,” Crowell adds. “They can’t play pickleball seven days a week because [their] knees and hips and joints [will hurt].”
People are living longer and often enjoy turning their hobbies into cashflow, so don’t assume that retirement is the end of the line for your income.
Revisit your plan annually
Starting in your mid to late 40s, it’s important to review your retirement projections annually. “Retirement planning is an ongoing process that requires regular review and adjustments,” Mascia says.
No one can predict the future, and life changes all the time. For example, did an older relative come to live with you and increase your monthly spend? Or did you inherit money that changed your base amount of savings? Reviewing your retirement plan each year will prevent you from being caught off guard so you know you’ll have what you need.
At the end of the day, think about the big picture. Where are you now, where do you want to be and how can you get there? The sooner you start thinking about these ideas, the better you’ll be when it’s finally time to start the retirement you’ve always dreamed of.
Photo by Yuri A/Shutterstock.com