This Is the No. 1 Question Americans Have About Retirement Planning: 5 Experts Weigh In
Putting money aside today is essential for financial stability in your golden years. Even if you are contributing to a retirement account, knowing how much to save can be confusing.
Over one-third — 37% — of Americans answered that their biggest concern regarding retirement planning is knowing how much they will need to save for retirement, according to a recent survey conducted by GOBankingRates. This, of course, can be problematic if you’re not putting enough aside to support the lifestyle you want.
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However, Chris Urban, CFP, RICP, founder at Discovery Wealth Planning, said not having a specific number to strive for isn’t necessarily an issue.
“Until you know with a fair amount of certainty how much you will be spending in retirement, your goal should simply be to save and invest as much as possible,” he said.
If you’re in your 20s or 30s, with retirement decades away, he said you don’t need to have a dollar amount in mind yet.
“You just need to focus your efforts on maximizing all of the retirement and investment accounts available to you, including any matching contribution(s) that your employer may make on your behalf,” he said.
If you’re in your 50s or 60s, he said to start figuring out how much you’ll be spending in retirement first, instead of how much you need to have saved in investment and retirement accounts.
“Come up with a realistic spending forecast for at least the next several years and use reasonable assumptions for years after that,” he said. “Then, you can think more holistically about how much you may need to have saved, ways to invest and draw down your assets and to strategize for ways to legally reduce your tax lifetime tax bill, etc.“
The Answer to ‘How Much Will I Need To Save for Retirement?”
Ready to calculate a retirement goal to work toward? Here’s some expert advice to get you started.
Determine Your Retirement Income Need
“Most families need about 65%-85% of their pre-retirement income in retirement,” said Jamie Upson, CFP, senior financial advisor and owner of Stonehearth Capital Management. “So if a family is making $100K, they will likely need about $65K-$85K in retirement. Let’s presume $75K for this example.”
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Add Up Your Income Sources
Next, Upson said to calculate guaranteed (or pretty reliable) income sources, such as Social Security, pension, income annuity and rental income.
“Let’s pretend these sources add up to $45,000 a year,” he said.
Calculate Shortfall
Upson said to use the following formula to find your shortfall:
retirement income need – guaranteed (or reliable) income sources = shortfall
“It is the family’s retirement savings that needs to cover this shortfall and will help determine whether or not a family is ready to retire,” he explained. “Based on the family’s age you can arrive at a reasonable ‘withdrawal rate.’ For someone 60-65, a reasonable withdrawal rate would be 4%.
“If 4% times their retirement savings is enough to cover the shortfall, then retirement is looking good. In this example, a 62-year-old family with $1 million in retirement assets should be able to withdraw about $40,000 a year from their portfolio. In my example, the shortfall is $30,000. So this family appears to have sufficient retirement assets to retire.”
Adjust for Specific Considerations
“Tailor your savings goal to reflect personal circumstances and preferences,” said Joseph Boughan, CFP, owner of Parkmount Financial Partners.
For example, if you anticipate a longer lifespan or hope to retire early, you’ll need to plan your retirement finances accordingly. Additionally, he said to consider long-term care costs, any home equity you plan to leverage, major purchases you want to make — i.e., travel, a second home, major hobbies — and bequests such as deciding if you’ll leave your money to loved ones or a charitable organization.
Pay Off High-Interest Debt
Saving for retirement while tackling high-interest debt can be a challenge, but this will become even more problematic if you bring this debt into retirement.
“Plan to begin to pay off high-interest debt,” said Nasha Knowles, CFP, a financial professional at Equitable Advisors. “Eliminating your debt will help to reduce financial stress during retirement and increase your cash flow.”
Adjusting for Inflation
Today’s dollar isn’t the same as it will be when you retire. Therefore, it’s important to factor inflation into your retirement plans.
“You’ll need roughly 20 times your salary in retirement,” said Noah Damsky, CFA, principal at Marina Wealth Advisors.
To adjust your current salary for inflation and what it might be by the time you retire, he shared a few approximations:
“If you’re 10 years away from retirement, increase your salary today by 35%.”
“If you’re 20 years away from retirement, increase your salary today by 80%.”
“If you’re 30 years away from retirement, increase your salary today by 140%.”
He said to multiply your future salary for inflation by 20 times to determine the lump-sum value you’ll need for a healthy target savings amount to amass by the start of your retirement.
Cynthia Measom contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: This Is the No. 1 Question Americans Have About Retirement Planning: 5 Experts Weigh In
