Most people spend more time planning vacations or car purchases than planning for their retirement years. That is a big mistake. I talk regularly on radio and television about people taking the time to plan for their future financial security. Failing to plan sufficiently for those 20 or 30 years in retirement could be the biggest and costliest mistake you’ll ever make. I want your golden years to be what you envisioned them to be and not a broke-down version like living in a trailer and watching television all day.
Sitting down and planning out your retirement years is intimidating (and not fun), but seriously, you have to do it. You must put in the time and effort to plan, and it makes sense to do it the right way. Here are important issues to consider:
One step that many people miss is determining how much money they’ll need to save now in order to reach their goals in retirement. Doing financial media means that I have to read a lot of financial literature. I saw a survey recently that stated only 42 percent of Americans have calculated how much money they’ll need in retirement. That means that well over half of us haven’t got a clue on how much we will need.
It doesn’t really make sense to leave one of the most important questions up to guesswork. If you don’t have a solid and accurate number, then you are setting yourself up to run out of money in your 70s or 80s. Running out of money means you will have to make major changes to your standard of living.
“Well over half of us haven’t got a clue on how much we will need in retirement.” Tweet
Financial advice generally starts with the phrase “Start saving as early as possible and save consistently.” You’ll be better prepared the earlier you start saving for retirement. Social Security likely will cover only 20% or less of your income needs in retirement, so you must supplement it with a retirement nest egg.
I like to say that $1 million in retirement should be able to get you $40,000 in income in retirement. Consider the monthly rate that you would need to save at the age of 20 vs. 30 vs. 40 and 50 to arrive at $1 million before retirement. Let’s assume an investment return of 6%. If you start at age 20, then you need to save only $361 a month. But if you wait until 30, that number swells to $698 roughly. If you wait until you are 40 to start saving, then you will need to save $1,435 a month, and waiting until 50 means $3,421 a month.
The lesson that we can learn is simple: The earlier in life you begin saving, the better prepared you’ll be when you retire. And with our longer life expectancies mixed in with the constant pressure of inflation and cost-of-living increases, the better prepared you will need to be for the 20 to 30 years in your retirement.
Disclaimer: Consult your tax advisor before taking any action on topics discussed in the blog.