The evidence is clear: people who can envision themselves in their “golden years” during middle-age have more successful retirements. They successfully create financial security (and the mental and physical good health that accompany it) for their post-working lives.
If you don’t have a clear target, or an accurate map, you’re likely to spend time and energy worrying about where you’re headed instead of enjoying the journey. So, let’s create a destination and a map for a financially secure post-working life.
Focus on the Essential Elements:
First, we must unclutter your mind and decrease stress by knowing your key metrics. For retirement accounts, we often call it your NUMBER. That’s the minimum amount you want in your bank and brokerage accounts that you will depend on for income when you’re finished earning wages.
The Employee Benefit Research Institute’s 2014 survey is out and it shows us what’s important for a successful post-working life. You can read it at: http://www.ebri.org/pdf/surveys/rcs/2014/EBRI_IB_397_Mar14.RCS.pdf But, if you’d rather have the cliff notes, here’s the step-by-step to get moving towards freedom.
Open and Maintain a Dedicated Retirement Account
Participating in a deferred compensation plan – IRA or 401k/403b/457 greatly increases your odds of accumulating enough to live 20 or 30 years after you exit the paid workforce. The EBR survey makes this very clear.
If your employer doesn’t offer a plan or you want to add to theirs, all the major brokerages and banks have IRAs for individuals.Your main consideration is the fees you will pay for the account. Look for annual maintenance fees, roll-over or exit fees, and the costs of purchasing securities with the account’s funds.
My #2 concern would be the ability to add funds automatically from your bank accounts. And then, start putting money into the account… next you’ll need to:
The majority of respondents in the survey have a NUMBER but 44 percent have NOT set a target amount. With no destination, most of us wander off course. Interesting to note that more workers (10%) plan NEVER to retire than those who plan to retire before age 60!
Research also indicates that people who can “see” themselves as older adults make more realistic plans. You can do a quick, free aging of a photo of yourself at http://in20years.com/
However, if you do want to quit working before you die, you need a target – the pot of money that you can draw from – via investment earnings and withdrawals – to cover your expected lifespan. It’s also worth noting that almost half of workers actually retire earlier than they expected to. A combination of health and economic conditions often cause us to change our plans.
You can use a “rule-of-thumb”:
- At 35, have an amount equal to your annual salary in savings/investments
- At 45, three times your annual salary
- At 50, four times your annual expenses
- At 55, five times your salary and
- At 67, (or when you retire), have eight times your final salary in investments.
To get a more accurate NUMBER, you’ll need to do a few more calculations:
A realistic life expectancy
Life expectancies, for citizens in developed economies, rose dramatically over the last century and you may be surprised at the number of years you’re likely to spend here on planet Earth.
And, thanks to the abundance of information on the internet, you can spend just a few minutes answering a series of questions about your current health and your family history and end up with a very accurate estimate of your lifespan.
I recommend going to LivingTo100.com to get your age number. Next you’ll need:
A realistic retirement budget
People tend to go in two directions with this number:
There are those who want to indulge in all the opportunities they missed while working:
- Long leisurely trips to “see the world”
- Moving to a posh retirement community with daily golf and bridge games
- Supporting (with time and money) their favorite causes
- Helping their kids or grandchildren with home down payments, new cars or college costs
And their are those who think their basic living expenses will shrink to almost nothing:
- No more new clothes
- No more commuting/transportation expenses
- Lower tax rates
- Fixed or diminishing housing costs
If you already create and follow a budget, you’ll find making a projection for post-work spending fairly quick and easy. If you’ve put off budgeting, you may find it more challenging. Either way, it’s worth your time to do more than a simple adjustment such as the 70 – 80 percent of current income many planners use.
Create your own budget spreadsheet using google’s Drive free products or start with a simple worksheet like the one at: https://personal.vanguard.com/us/insights/retirement/tool/retirement-expense-worksheet
Once you know how much income you need, you’ll be able to get:
A realistic target account balance
Once you have a good idea of how long your money needs to last and how much you’ll need to live comfortably, you can take those to a calculator that can help you find a range of account balances (your NUMBER) to target.
Caution here: be realistic. Inflation is your biggest risk over a 20 or 30+ year post-working life. When running scenarios, always use a range of low (2%), medium (4%) and high (6%) inflation rates.
Check your locality’s historical inflation rates but investigate the mechanics before putting your faith in them. For example, the USA’s Fed publishes a monthly consumer price index (CPI) that’s considered a benchmark. However, you may be surprised to find out that they exclude food and fuel (two big items in most people’s budgets) because they’re too volatile.
Next you’ll need a realistic number for how much your portfolio will earn. If you’ve been an investor for 10 years or more, your personal annualized rate of return (dividends and capital gains) can be accurate. If you’re just getting started, you’ll have to use some generalized market returns. The most widely used benchmark is the S&P500 (SPY) for the USA markets. Use the past 10, 20 and 30 year returns to develop a range for your accounts.
Note: Most planners want retired folks to live off dividends and interest from debt instruments (bonds and CDs). I VERY strongly disagree. If you plan to live 20 to 30 years off your portfolio, you’re going to need the capital gains equities provide. When using the calculators for your portfolio’s returns, I suggest you set them at 90% – 100% equities.
Your long-term investment perspective allows you to ride out the downturns and capture the upturns that inevitably follow in the equity markets. Volatility IS NOT synonymous with risk but inflation is a real risk. For a much longer discussion of this issue, I suggest you find a copy of Nick Murray’s Simple Wealth, Inevitable Wealth (self-published) book.
Now, take all those numbers:
- Life Expectancy
- Annual Income Requirements
- Inflation Rate(s)
- Portfolio Returns
- Any current savings balances
- Your current and estimated retirement income tax rate
- Any pension or social security income you realistically expect to receive in retirement
to a good online calculator. Here are a few to try:
- Age 50
- Retire at 67
- Live to 97
- $100,000 annual income
- Replace 90%
- Current Savings/Investments: $400,000 (4x income)
- Save 15% (next 17 years)
- Income increases by 3% per year and 3% inflation
- Investment returns 9%
$2.2 million or
$3.2 million (leaves $3.3 million to estate) or
$1.6 million (to replace only 80%)
Learn to Make Your Investments Grow
You can’t park your money in a CD at zero percent and have a hope of living financially free after you quit working. You must learn to make your account grow along with the general equity markets.
It’s not that hard – but it will require that you to develop a plan and stick with it. That’s what MoneyDiva.com is here to help you with.
Live Long and Prosper – Leah, the MoneyDiva.com
Do you have your “NUMBER”? Comment below!