Retirement isn't what it used to be. In many ways, it's better, people are living longer and enjoying healthier and more active retirement years. On the financial side, however, trends are not as bright. For a combination of reasons, the goal of a financially secure retirement is becoming increasingly difficult to achieve.
People used to rely on Social security benefits to see them through retirement. You shouldn't. The current average monthly Social Security benefit places a retiree just above the federal poverty level. This amount of income certainly won't support the retirement most of us dream of. At best, you can depend on Social Security to provide a basic safety net.
And these days, fewer companies provide pension plans for their employees and people change jobs more often than in the past, making it less likely that they will qualify for a significant employer pension.
How much should you be saving now? Let's assume you like the idea of having a high probability of maintaining your lifestyle over a 30-year retirement. What percentage of your pre-tax salary should you be saving now to give yourself a good chance of achieving that goal?
First, our assumptions:
• No previous retirement savings — you're starting from zero. If you already have retirement savings (and you're one of our client), you can log in with your ID & Password to view your account.
• You plan to spend 80%~ of your pre-retirement, pre-tax income in retirement, adjusted for inflation and highly likely to be sustainable for roughly 30 years (assumes retirement at age 65).
• Social Security or other income will provide 25% of your retirement income needs each year. Your portfolio will have to provide for the rest of your spending needs in retirement. (We assume a conservative-to-moderate portfolio allocation in retirement, with no intent to leave a portion of the portfolio to any heirs.)
• Your pre-retirement income will grow (at least enough to keep pace with inflation) during your working years.
• You average a compound annual return of 8% on your pre-retirement investments, with 2.5% inflation.
Given these assumptions, here are some broad guidelines for the percentage of your salary you should be saving each year for retirement. These are minimum targets. you can save more to increase your probability of success, all the better. Remember, this assumes you have no retirement savings thus far.
This Retirement Planning Worksheet will show you a quick estimate of the total amount of money you're likely to need for retirement.
Once you start, the same savings goal applies until you retire. In other words, if you start saving roughly 12% of your income in your mid-20s and have the discipline to maintain your savings plan, you shouldn't have to increase that percentage as you go through your 30s, 40s and so on.
That's the benefit of getting an early start saving for retirement: The lower-percentage savings guideline stays with you the rest of your working life, if you can stick with it. The later you get started, the higher the percentage of your income you'll need to save.
To find out how much will you really need once you've retired, and what are your chances of meeting your goals, Click Retirement Income Calculator. This Retirement Income Calculator shows how market uncertainty affects your retirement income strategy.
Of course, the paradox is that during our twenties, when we can lock in the lowest savings rate, we're not thinking about retirement. We're paying off student loans, saving for our first home, buying furniture and home entertainment systems, and generally having fun. Then, by the time we get past that stage and start getting serious about the future, we've grown so comfortable in our lifestyles that the percentage of income we need to save seems beyond our reach.
General guidelines are all well and good. But if you're truly concerned about your ability to achieve the retirement of your dreams (and you should be), you should analyze your particular situation in more detail to figure out what makes the most sense for you. Get some help if you need it and revisit your plan regularly to make sure you're on track.
It may not be easy, but retiring with peace of mind is worth the effort. Please contact us today to plan for your prosperous retirement years!
© 2014 Michael J. Porro & Company