Ask a CFP: 'Is Anyone Ever Done Saving for Retirement?'

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By Matt Shapiro

In our "Ask a CFP" Q&A series, we cede the floor to a certified financial planner who will address what we think are some of the trickiest money topics out there.

Today, Matt Shapiro, a certified financial planner with LearnVest Planning Services, delves into whether there's ever a point when you can comfortably consider yourself finished with building your nest egg.

"From the time you earned your first paycheck, you likely heard the same advice over and over: Start putting away for retirement -- now!

And it is sage advice to consider, especially when you look at the stats: The median nest-egg balance for American households last year was a mere $2,500, according to the National Institute on Retirement Security.

Data like this shows just how imperative it is to make your golden years a priority -- and may lead you to believe there's no such thing as saving too much for retirement.

That's why I sometimes get asked:

Why So Many People Ask This Question Few of today's workers have access to pensions, and the future of Social Security remains uncertain -- leaving the onus of planning and saving for retirement largely in your own hands.

Plus, when you see headlines about how Americans aren't saving enough for retirement, it's only natural to feel stressed about making sure you're setting aside enough in your 401(k) or IRA.

What I Tell Them From time to time, I do see people in their 30s or 40s who may be able to stop saving for retirement early -- the ones who receive a large inheritance.

For the rest of us, figuring out when exactly we could be 'done' is hard to do without first doing a reverse calculation, based on your target retirement number.

To get to your number, you need to determine how much income you think you'll need to live on each year, based on your retirement lifestyle goals, then multiply that by the number of years you expect to be retired.

And if you don't yet know how you envision your future retirement lifestyle, consider basing your calculations on the assumption that you'll need to replace 85 percent of your income in your golden years.

So let's say you think you'll need $4 million to retire comfortably at age 67. Assuming a hypothetical 7 percent annual return on your retirement investments, you could, in theory, stop contributing to retirement if you had close to $500,000 in your nest egg by 35.

Realistically, few of us reach that level of retirement savings so early in life -- most of us will likely have to keep contributing up until close to the age we intend to retire.

So the question you probably should be asking yourself instead: 'Am I saving enough now to retire by my desired timeline?'

Of course, the answer to that will vary by individual, but generally the younger you are when you start saving, the sooner you'll likely be to reach your goals -- thanks to the longer amount of time you have to take advantage of compound growth.

Let's look at another example: Say a 25-year-old man wants to save $1 million to retire by age 67. If he starts to set aside $500 a month right away in a 401(k) that returns a hypothetical 7 percent a year, he could surpass the $1 million mark by 63. If he keeps saving for another four years, he could reach $1.4 million -- and that's not even taking into account any company match.

However, if he waits until 40 to start saving but doubles that contribution to $1,000 a month, he'll only have earned about $927,000 at 67 -- $73,000 shy of his initial goal.

So by starting early, the man is able to surpass his goal without having to raise his retirement contribution over time -- and making it potentially easier to devote increases in income toward other goals, like contributing to a kid's college fund.

By starting later, he may have to decide if he'll retire later -- or choose to live off a smaller retirement number.

The Bottom Line There's no hard-and-fast rule when it comes to knowing when you can consider yourself 'finished' with saving for retirement -- it all depends on the progress you're making toward your retirement number.

So consider doing the calculations now to see whether you're a few years ahead of schedule -- or need to step up your savings game."
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