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Planning for retirement is complicated, and one of the most challenging aspects is figuring out how to set a realistic goal for retirement savings. Without knowing how much money you’ll need or have on hand when you reach your retirement age, all of your other plans and strategies remain up in the air. You’re unable to move forward with any real sense of confidence or security. That’s why it helps to start with some tips on how to forecast your savings and calculate the size of an adequate nest egg. There are ways to guesstimate the amount you should be stashing away, so let’s take a look at those options…
Online Retirement Savings Calculators
There are many automatic retirement savings calculators available to use online that are free and you’ll find them on the websites of most financial institutions. Plug in information about yourself to instantly get a ball park idea of where you stand financially and what you might need to do to prepare for retirement. Be advised, however, that the best these tools can do is to give you some very rough estimates.
Mortgage or credit card calculators work with specific, limited data like interest rates and a fixed repayment schedule, for instance, so they can be extremely accurate. Retirement involves a lot more variables – many of which are unknown – so retirement calculators may not be nearly as reliable. The calculator may assume, for example, that you’ll earn returns on your stock market investments that mimic the average historical performance of the Dow Jones Industrial Average over the past 50 or 75 years. Many investors saw their retirement portfolios fall by 50 percent or more, however, when the global economy imploded about five years ago. That is not to say that retirement calculators aren’t useful, they are, as long as you accept their real-world limitations. Check out additional retirement tools, here.
Income Multipliers and the 4% Rule
It appears that many firms and industry experts recommend a varied amount of what is necessary for retirement. Many financial advisors follow a rule of thumb that most people will need 12 times their annual take-home pay in order to fund a retirement by age 65, but others say you only need 11 times your salary. Investment firm Fidelity – which has plenty of experience and expertise – recently said that eight times your salary should be enough. Once factor that alters those numbers is if you continue to work and earn past age 65. The multiplier would then drop, and if you want to retire sooner, it will increase.
You’ll also hear a great deal about the 4% Rule, which states that during retirement you can withdraw approximately 4.5% of the money from your savings every year and still live comfortably. It takes inflation into consideration as well, and is estimated to last 30 years-the average length of time for retirement. If you stashed away $1 million, for example, then applying the 4% Rule will tell you that you can withdraw $40,000 a year without outliving your savings.
There are some skeptics to the 4% approach, thanks to historically low bond yields and the turbulent stock market. The 4% Rule was created in the 90’s and based on a model portfolio, which is no longer the “typical” standard.
The 70-80 Percent Approach
Financial planners oftentimes approach the problem a different way by suggesting that you will need 70-80% of your pre-retirement income. That’s considered one of the most reliable formulas and it’s also one of the simplest to apply. Those who recommend it do caution, however, that if you have not paid off your mortgage by the time you retire then you may require more than 80 percent because of that additional expense. Many modern retirees are more active during retirement too, which costs money.
Baby Boomers, for example, have a different mindset than their parents and grandparents, and they want their lifestyle to reflect an attitude that “60 is the new 40!” Since they feel so youthful, energetic, and adventurous, retirement may trigger an increase in their spending as they seize the chance to live it up – which is the opposite of what retirees have traditionally done. If you never had children that can also skew conventional predictions that are historically based on people who have kids to support until they near retirement. Once the kids are grown adults, parents usually enjoy a dramatic drop in their overhead, which makes it cheaper to live out their retirement years. If you don’t have kids, however, those projections may not apply to you. Go ahead and apply the 70 percent theory, but to play it safe, take into consideration your own personal view of what retirement means and how you would like to spend it.
The Key is to Start Somewhere, Right Now
There is no one-size-fits-all methodology, but you can develop a reasonably clear picture if you take advantage of as many sources of information as possible. Read as much as you can, employ as many methods as possible to brainstorm the issue, and consult the experts.
One thing is clear though; you need to start saving right now and continue saving aggressively if you want to have sufficient savings for retirement. The majority of professional retirement planners agree that if you start at an early age by socking away at least 15 percent of what you earn, you’ll have little to worry about and should be in great shape.
Sure, 15 percent is a big savings goal, but it’s also just a nickel and a dime set aside from every dollar you make. That’s possible, and if it will set you up for life when retirement rolls around that’s a grand bargain. There is an old saying that the journey of a 1,000 miles begins with a single step. That’s a great way to envision your retirement savings plan. The biggest hurdle for most people is to take that first practical step and actually put their actionable ideas into motion. Do that and you’ll already be way ahead of the curve.