Save for Retirement Now

By on May 5, 2014 in Retirement | 32 comments

How Much Money Do I Need to Retire?

News Flash! US News Smarter Investor Blog showcases my; Create Your Optimal 5 ETF Portfolio. And Bankrate.com and Yahoo! Finance published my retirement interview, Early Savings Pay Off Later in Retirement

There’s a lot of talk about saving for retirement and how much money you will need. To help with this dilemma, there are calculators, books, and articles galore. The simple answer to “How Much Money Do I Need to Retire?” is, you need a lot of money if you anticipate living large in retirement and not so much if you’ll reside in a camper, and park it on a beach in Mexico.

For many in their 40’s, 50’s, and 60’s, there’s the fear that “I haven’t saved enough.” That fear hits when you read an article about retirement, or experience job uncertainty, or retirement planning is mentioned on the news. The automatic reaction for many is to change the channel, turn the page, or divert oneself from the topic.

Please, don’t avoid this topic. Even if you’re in your 20′s, the earlier you begin saving for retirement, the wealthier you life will be. By starting now, you give yourself the opportunity of choice and freedom that a six or seven figure retirement nest egg affords.

retirement saving

I was speaking with some older friends recently who divulged that they are panicked about retirement. Devon, the husband just lost his job at age 65. They live in Manhattan and want to remain in New York City, yet they can’t afford to retire right now. They do not want to move and Devon is job hunting. Their solution regarding retirement planning is to avoid talking or thinking about it.

Avoiding Retirement Planning Will Not Make it Go Away

Fight the urge to avoid and create an action plan.

How do you go about figuring out that one perfect number to shoot for? First off, the future is unknowable, there is no perfect number.

My dad got very sick and moved to a nursing home. No one predicted that the strong, independent, self reliant guy would need this type of help! Dad rarely missed a day of exercise or healthy eating. Fortunately, he and my mom saved and invested from the beginning and thus had the funds for his care.

How much to save for retirement depends on many factors. Todd Tressider, financial coach and author of How Much Money do I Need to Retire mentions 7 questions to answer when considering how to save for retirement. The response to every question is a guess; but the questions get you thinking and planning for retirement.

Write out your answers to these retirement questions:

1. What amount of money will you spend every year from the day you retire until the day you die?
2. What will be the inflation rate during your retirement years?
3. What year will both you and your spouse die?
4. How much money will your company pensions and Social Security pay over the duration of your retirement?
5. What will be the growth rate of your investments over your remaining lifetime?
6. What will be the sequence of those investment returns? Will you have good years in the beginning followed by bad years or vice versa?
7. What age will you and your spouse retire— regardless of whether it is voluntary, due to unexpected sickness, or due to forced layoffs out of your control?

“Not to be a pessimist, but can you see why this is not the exact science that the books, calculators, and financial planners have led you to believe? Hidden behind the scientific façade of computers and mathematics are some very big assumptions. None of these questions can be answered with certainty, yet all of them must have accurate answers or your estimate for how much money you need to retire will be wrong.” Todd Tresidder

How to Plan for Retirement

Think about expenses which will be reduced, such as gas and dry cleaning. And counter-balance those with costs that may increase, like healthcare. Map out several scenarios.

After you ballpark some estimates for future retirement expenses, use a retirement calculator to get a dollar amount. I used this retirement calculator to project my future retirement number. I put in a few scenarios in order to test out various alternatives. It gave me an idea of both best and worst case financial outcomes.

Accept the fact that there’s anxiety in this type of planning. The worst alternative is to do nothing. I know far too many people who avoided planning and are filled with regret and stress. Saving more now is better than doing nothing.

My recommendation is to save as much as possible starting now. Since retiring in a recession or boom time can impact your long term retirement wealth as can inflation or unplanned health expenses, it’s a good idea to set a financial target and work towards that figure.

Waiting, avoiding, and overspending will lower your long term wealth and increase your stress. Once you look at the projections, you’re on your way to taking control of your future.

Action Plan

1. Set aside a few minutes to review your money coming, going out, and amount in savings and investing accounts.

2. Increase your workplace retirement and/or Roth IRA contributions.

3. Schedule quarterly financial reviews and make sure you’re diverting enough of your today’s earnings for tomorrow. Use a retirement calculator to decide whether you’re on the right track or not.

How much attention and time are you devoting to your retirement planning? 

A version of this article was previously published (some comments remain)

    32 Comments

  1. It is never to early to start thinking about retirement. I opened my retirement account pretty soon after I got the first paycheck from my first job out of college.

    Sean @ One Smart Dollar

    October 15, 2012

  2. I’m still behind on my retirement goals, but at least I’ve started something. My plan for 2013 (once I secure a full-time teaching job) is to shove a large portion of my pay increase into retirement. I’m realistic and realize I will probably have to work until I’m 70 or 72 – as long as my health stays in-tact!

    Little House

    October 15, 2012

  3. I agree that the worst alternative is to do nothing. Yes, it’s true that none of us will really know for certain what we’ll need in retirement until we’re experiencing it (and some of us will experience it for many, many years.) But we all know we’re likely to need SOMETHING.

    Jackie

    October 15, 2012

  4. Rather than worry about how much is needed for retirement, the thinking should be: How will I pay my bills? Savings won’t cut it. You need to have some income streams.

    cashflowmantra

    October 15, 2012

  5. I started saving a decent chunk in my first post college job. I don’t have the details hammered out yet but at least I am saving!

    Lance@MoneyLife&More

    October 15, 2012

  6. I completely agree that the worst thing to do is to just do nothing. Let that fear that you’ve not saved enough drive you to start working at it and throwing all you can at retirement.

    John S @ Frugal Rules

    October 15, 2012

  7. @Sean, John, Jackie, and Lance, starting early-You are great models. You don’t need to have the details worked out, but putting the caash away and investing it for the long haul is the path to grow your wealth!
    @Little House-Good attitude, progress toward your goal is what’s important. Your money will grow and compound ove the long term as you add to it.
    @Cash Flow, thanks for bringing up the concept of creating income streams. Reduces the pressure to have a boatload of cash.

    Barbara Friedberg

    October 15, 2012

  8. HAH! I love that photo of the man burying his head in the sand. Sadly it reminds me of older relatives who are thinking about their retirement quandary now, well into their 50′s.

    I am in my early thirties and squirreling away as much as possible, while I still have the energy to do so!

  9. Thank you for mentioning my book. Much appreciated! Cash flow was right in mentioning income streams, and it is not mutually exclusive. Assets are only valuable as they translate to spendable cash flow, and cash flow translates as a multiple to an asset. It is not either/or: it is both. A good rough guideline is every 1,000 per month roughly equates to about 300,000 in assets. This is true whether it is 1,000 increase in monthly cash flow or 1000 reduction in monthly spending. The math is all the same. Hope that helps.

    Todd Tresidder

    October 15, 2012

  10. For some, thinking about retirement or retirement planning is like funeral plans. You put it off until you cannot any longer. The difference is waiting makes it more difficult or nearly impossible.

    krantcents

    October 15, 2012

  11. @Jennifer, Don’t get me started about some older folks I know. I wish I could shove my advice down their throats (too harsh?) :)
    @Todd, I like the cash flow to assets translation, interesting. Where did you come up with that, is the the potential return you would have earned on $300,000?
    @Krantc. GReat analogy!

    Barb

    October 15, 2012

  12. I think about this all the time and it stresses me out because we are so far from retirement. We are only 32 and 33 and have decades to save for retirement. We are big savers and are actively saving but I have trouble figuring out the amount we should be shooting for.

    Tons could happen over the next 20 years. What will things cost? What will our health be like? There are so many unknowns!

    Holly@ClubThrifty

    October 15, 2012

  13. Many don’t save for retirement because they are living paycheck to paycheck and have no idea where their money goes. I agree getting to the point of saving for retirement is a high priority, yet paying off debt and controlling cash flow free up the money needed for save for ‘retirement’.

    Brent Pittman

    October 15, 2012

  14. @Holly, I completely understand your worries. My recommendation is to keep on saving and investing in diversified index fund portfolios and accept that no one knows the future. As long as you are starting young, that gives your money a long time to grow.
    @Brent-thanks for bringing up those issues as well. Paying off consumer debt should be the number one priority as those interest rates are eating through your cash.

    Barbara Friedberg

    October 15, 2012

  15. Great post. You made many great points, but I think that your question #6 is a critical point that is often overlooked. Ask anyone who had just retired in say mid 2007. People are often fixated on average return, but a major loss early in retirement can really derail your plans.

    Roger Wohlner

    October 16, 2012

  16. Congrats on the huge mentions! The funny part of this: your points are straightforward and will give you a good answer when you ask “what do I need to do?” Why would people use rules of thumb when they can just do it the right way like you’ve outlined above? It really isn’t difficult.

    AverageJoe

    October 16, 2012

  17. I agree it takes planning and dedication to get on the right path. Also time is a critical element to get you the results you need to be financially free.

    RichUncle EL

    October 16, 2012

  18. @Roger, That’s why it’s so important to have a certain percent of your retirement assets in cash, I bonds, or TIPS.
    @Joe, Thanks for the props. It’s tougher, but not impossible to save for retirement with a later start.
    @Rich-As I mentioned to Joe, more time is certainly better to let the magic of compounding work.

    Barb

    October 16, 2012

  19. Hi Marie, I can imagine how much thinking and planning that type of decision requires. Are you enjoying your retirement?

    Barb

    October 17, 2012

  20. My hubby and I have been saving for retirement since we have been able to. Having pensions at work helps with this but we do have our own retirement accounts on top of this. I think putting a scheduled deposit into place that you never see really helps. Out of sight, out of mind.

  21. @Miss T-By far, automated investing is the most certain method to prioritize retirement saving.

    Barb

    October 17, 2012

  22. I really like the idea of writing different scenarios – I use scenarios in my work and find these very powerful tools. I am a bit puzzled about the seven questions, though – how do I answer questions like what will be the inflation or what year am I going to die in?

    maria@moneyprinciple

    October 17, 2012

  23. @Maria, Your question highlights the imperfect nature of retirement planning. It is based upon uncertain expectation. I personally fall back to historical data and assume inflation will be 3%.

    Barb

    October 17, 2012

  24. I am in my mid 40′s and I started saving for retirement after I earned my second college degree. The world has changed and it is important for everyone to prepare for retirement. Remember, time waits for no one.

    Colorado Rockies Barry

    October 18, 2012

  25. Retirement planning is pretty much a daily, if not continuous, conversation in our household. My wife’s reading list is almost exclusively retirement and money planning types of books. I’m more of a ‘dabbler’ in the topic. :-)

  26. @Kurt, With that type of attention, I’m sure you are both on the right track. What type of information do you and your wife like to read??

    Barbara Friedberg

    May 5, 2014

  27. One thing that has made a huge difference in the amount I have been able to save for retirement is by taking the majority of salary increases and earmarking that for savings. Congrats on the mentions Barb!

  28. You have to take retirement seriously. The later you save the harder it becomes. I’ve invested some money into a Child SIPP for my children so they’ll have a head start in life for their retirement.

  29. I have been maxing out my retirement accounts every year since I got out of college. My wife and I are on schedule to retire in 9 years. Our “number” is $2.4 million. We continue to max our retirement accounts, and invest what used to be our mortgage payments, along with any leftover money at the end of each month in taxable accounts.

  30. @Paul-We have done the same thing since the beginning. Now, saving and investing all extra money for retirement is just a habit and it’s made so much difference now that retirement is getting closer.
    @Nick-The earlier one starts, the easier it is to let that money grow and compound. Now, if we could just get the word out to the 20 and 30 year olds. Any ideas?
    @Bryce-Inspiring!! That is the perfect solution for a secure retirement!

    Barbara Friedberg

    May 7, 2014

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