I’m a Financial Planning Expert: Here’s How Much Boomers Should Have in Their Savings Accounts
Trying to figure out how much money to save can be challenging for many baby boomers nearing or already in retirement. While you want to make sure you have enough money to last the rest of your life, you also want to be able to enjoy your golden years.
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Plus, how can you determine the right amount to have in liquid savings accounts vs. retirement savings accounts? While the answers are often dependent on your individual circumstances, there are some important ways to think about these issues.
Here, Rob Burnette, CEO and investment advisor representative at Outlook Financial Center, discusses how boomers can think about savings.
Having Enough Emergency Savings
A good place to start when thinking about savings is to make sure you have enough in your emergency fund, which can look a little different for boomers.
“The traditional thumb rule is for people to have in their emergency fund three to six months worth of expenses,” said Burnette. However, he adds, that guidance is primarily for people in the workforce, as that amount would give them enough runway to find a new job.
But that might not be the case for boomers who are nearing the end of their working years and perhaps already living off of retirement income. Plus, they may not want to take on as much risk at that stage of life.
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“As people get older, they tend to get a little more conservative. And it’s not uncommon to see them with anywhere from six to 12 months’ worth of expenses in their savings account,” said Burnette.
These emergency savings might not earn much return, other than what your bank pays in interest. While some clients complain about that, Burnette said, “that’s not the purpose. Its purpose is not to grow; its purpose is to be there when you need it…, so you don’t have to put an emergency expense on a credit card at 20%+ percent interest rate.”
And if a boomer needs to raid their investment accounts to cover things like replacing a roof, he says, that could stand in the way of reaching their other goals.
Ideally, you would also design a spending plan that leaves some room to replenish your emergency savings, rather than only being able to use your emergency savings once, he adds.
Having Enough Retirement Savings
In addition to having enough in your emergency fund, it’s important to save and invest enough to be able to afford retirement. However, there’s generally not a one-size-fits-all rule around how much to save, says Burnette.
“The old 4% rule in my mind doesn’t work,” he says. “It’s all going to be driven by: what’s your lifestyle, how much is your monthly spend, how many vacations do you take,” etc.
For some people, $500,000 is more than enough savings, because they’ve been used to living off of a relatively low income and can make up a good portion of that via Social Security. But if you want to spend, say, $12,000 per month in retirement, you’re going to need substantially more than that, notes Burnette.
Advisors like Burnette often use software that can look at different retirement variables and determine how much you need to have in your retirement portfolio to generate a given amount of retirement income.
He essentially does a cash flow analysis to help ensure you have enough to cover your lifestyle along with other expenses, like medical care, until around age 90 or 95.
For a retired couple who’ve both hit 65, their out-of-pocket medical expenses are between $250,000 and $400,000, said Burnette. “Half of that’s going to be spent in the last two years, because end-of-life care is expensive. We want to make sure they have a buffer in their cash flow to allow for that so that they can then go get the care they want.”
Covering Savings Shortfalls
If it looks like you’re short on savings, there are a few options to consider. One is to cut back on spending, so your retirement savings can last longer.
With the plethora of subscription services, for example, “lots of folks have things that they’re paying for that they don’t use anymore, and they’ve forgotten about it, because it just automatically gets drafted,” said Burnette. “So, sit down and have an audit of those kinds of expenses.”
Another solution could be to sell your home. While you might have needed a larger home in the past, such as if you raised kids there, perhaps now you’re empty nesters and don’t need to keep putting time and money into upkeep, noted Burnette.
“If it’s got good equity in it, maybe it’s time to sell the house, downsize, buy something for cash, get rid of other debts and other bills, and just simplify your lifestyle,” he added.
Many retirees also continue to work at least part-time.
“Just because you’ve retired from one job doesn’t mean you’ve retired totally from the workforce,” said Burnette.
Essentially any of your hobbies or something you’ve always been interested in pursuing but haven’t had the time for could be turned into some extra income in retirement.
Don’t Forget About Taxes
Lastly, when thinking about how much money to have in savings, consider the effects of taxes. If all of your money is in taxable brokerage accounts, for example, your net income would generally be lower than if all of your money was invested within a Roth IRA. But you don’t necessarily want to choose one over the other.
“I’m a big fan of what I call tax diversity,” said Burnette. Having money spread across brokerage accounts, traditional retirement accounts, and Roth accounts can help you end up with more money overall.
“In retirement, if you’ve got all three of those buckets, then you can take advantage of whatever the tax code offers” in terms of making withdrawals in a way that minimizes taxes.
But like with determining savings amounts, taxes can be highly individualized. Figuring out the best way to save, invest, and plan for retirement as a boomer can vary, so consider speaking with a trusted advisor or at least attempt to calculate how much retirement income you’ll need and go from there.
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