About 75% of Americans over 40 fail to save for retirement, and nearly a third say they have no retirement savings. With the future of Social Security somewhat uncertain, preparing for retirement today is key to funding your future. Oddly enough, in my experience, I find that many people approaching retirement haven’t thought about how they will generate income once their paycheck is gone. Of course, you may receive between $20,000 and $40,000 in Social Security benefits, but that may simply not be enough to cover rising health care costs, general inflation of goods and services, and any emergencies. may occur in 20 to 30 years. retirement period. That’s not even including the fun stuff, and isn’t that the point of retirement, at least to some extent? You’ve worked hard for the past 40 years or so, and now is the time to enjoy the fruits of your labor. If you haven’t prepared well for retirement, these fruits might not be what you expected.
On your journey to retirement, there are important milestones to consider and routes you can take to help you reach your destination. One wrong turn can result in a much longer trip. One of the biggest mistakes I see is procrastination. It got us in trouble preparing for a college exam, and it now gets us in trouble preparing for a successful retirement. Having a roadmap in place is key to making informed decisions on how best to proceed. If your savings are not properly invested, every passing day wastes your time and, more importantly, you lose the benefits of compound interest. The first step on the road to retirement is to find your “retirement number”. It’s cliche, isn’t it? However, identifying this number will help you determine how close you are to achieving your desired retirement lifestyle. Your retirement number is the sum of liquid assets needed to produce targeted cash flow in retirement.
As we go through these examples, keep in mind that the numbers we use may change depending on your specific lifestyle, but the concepts and general math will remain the same. For example, let’s say you spend $100,000 in total before taxes each year. If a $100,000 lifestyle is what you want to live in retirement, you need to know how much that lifestyle will cost in future dollars, taking into account the impact of inflation on goods and services. So if retirement is 20 years away and we use an assumed long-term US inflation rate of 3.5%, at retirement you will need about $198,000 to live a similar lifestyle. Maybe you want to travel more in retirement and spend $120,000 a year, or maybe you’re simplifying your retirement life and planning that you’ll only need $80,000 a year. In either case, be sure to apply the inflation rate to the remaining years until your retirement date.
Once you’ve estimated your future cash flow needs, you need to subtract any fixed income from sources like Social Security, pensions, or rental real estate. Let’s say these sources together provide about $80,000 in annual income. Therefore, the true required annual shortfall of your asset base is $118,000 ($198,000, the amount needed per retirement year, minus $80,000, the annual income amount). The general rule is that you don’t want to spend more than 4% of your investment assets on an annual basis. This so-called 4% sustainable distribution rule is intended to provide a retiree with a withdrawal rate that will allow the asset base to sustain itself over a retirement period of 20 to 30 years. To find your figure, simply divide your shortfall by 4% (in this case, $118,000 divided by 0.04), which gives us a target of approximately $2.9 million for accrued assets at the end of the year. retirement.
Now that you know approximately how much you might need in retirement, you’ll need to design a savings rate and investment plan to get there. Here’s where funding becomes essential and why procrastination kills retirement success. Let’s say Lucy starts saving at age 30 for 10 years at $18,000 per year. She stops at 40 and does not save a penny more. His total contributions were $180,000. Alex, meanwhile, starts saving at age 45, at $18,000 a year for 20 years. The sum of dues for Alex was $360,000. Assuming Alex and Lucy earn a 7% annualized rate of return and reach age 65 at the same time, Alex will have approximately $789,000 at age 65, while Lucy will have $1.4 million. So when it comes to saving for retirement, there really is no better time than the present.
Finally, once you’ve figured out how much you need to save (my suggestion is as much as you can), you’ll need to assume a growth rate and tax burden on your investments. Remember, when we started this example, I noted a lifestyle of $100,000 before taxes. Tax rates are a constant and somewhat unknown variable, as are short-term investment returns. From a tax perspective, the best you can do is to use current tax legislation to create a tax-efficient environment for your assets. Using strategies such as Roth conversions, tax loss collection, asset tracing, 1031 exchanges, installment sales, and charitable trusts can help reduce the tax burden of your investments. Every dollar saved on taxes is another dollar added to your retirement number. As Americans, paying taxes is our duty, but paying too much certainly isn’t.
Taking the time now to think about your personal retirement expectations and make some simple projections will help you decide how you plan to fund your future, but for how long — start today.