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Future Savings Goal Planning
While retirement planning is definitely the most important financial calculations you’ll ever work on, many folks are scared off by the sheer number of variables involved. Well here we’ve taken care of the often overlooked details, such as the time value of money and compound interest. You just need to plug in your current finances to see if you’re on track for financial security in your golden years, and if not, exactly what you need to tweak.
To simplify the vast number of investment options out there, we’ll start with a “worst case” scenario by assuming your retirement goal is $1 million within 45 years, and you have $0 saved already. Then we can work backwards to see which types of investment approaches will achieve your goals. At any time, just swap out these figures for your unique circumstances, such as years to retirement or current life savings, for your own custom retirement planning solution.
Regardless of what specific avenue you invest in, they all break down into one of three approaches:
1. High Risk/High Reward
These tend to involve business partnerships, active securities trading or “exotic” investments. You can model these in the calculator with higher investment returns and less frequent contributions, but lager contributions or a higher initial investment.
2. Low Risk/Low Reward
These tend to involve investing in bonds, real estate, money market accounts and insurance-like products. You can model these in the calculator with lower returns and more frequent contributions, but with less initial capital required and smaller regular contributions.
3. Diversified to Balance Risk/Reward
These are often traditional 401K’s or similar plans, diversified across a basket of individual stocks, funds, bonds and other securities. You can model these in the calculator with a middle rate of return and much more frequent though smaller contributions.
For practical examples to “solve for” your retirement goals, let’s break down the options in more detail:
Calculating Your Retirement Needs
Will I have enough money to retire? This may be the most asked question from people thinking about retirement. Other similar questions are: Will my 401(k) be enough? Will I be able to live on Social Security? For everyone asking these questions, there are different factors that affect their answer. We’re going to give you enough information that you should be able to get a very good idea of where you stand.
How Much Income will I Need in Retirement?
You might be happy to learn that the living expenses of most people in retirement are below their current living expenses. In a recent study by the Bureau of Labor Statistics (BLS), they reported that in the period just before retirement, (50-64 yrs.) workers have average expenses of $54,400. The study also reported that after retirement (65-79 yrs.) they had annual outlays averaging $41,900. That’s $12,500 less!
Where does the savings of more than $1,000 per month come from? We’ll start with housing. The BLS found the post-retirees versus the pre-retirees reduced their annual housing costs by $3,300. This was done primarily through paying off mortgages and downsizing. Food costs are another meaningful reduction in expenses once retired. The BLS reported that the average savings in food is $7,700 before retiring, while after retirement costs averaged $6,400. That’s $1,300 — More than $100 per month.
How about the cost of commuting to work? According to the same report, this is the most dramatic way retirees cut spending. For those in the 50-64 yr. age group their transportation costs averaged $9,600. Retirees in their late 60s spent only $7,900. As people advance past their 80th birthday, transportation averages only $3,600 per year.
Remember, once retired you’re likely to reduce or eliminate your need for work clothing. Additionally, household appliances are replaced less often, and other expensive consumer purchases won’t be as frequent.
Most Have Forgotten About This Savings
One large overlooked eliminated expense in retirement is, are you ready? Saving for retirement. When you leave your employer, you no longer put away money for retirement. You won’t be contributing to a 401(k) plan or an IRA, and your income or pay won’t be withholding Social Security. According to this same BLS study, these contributions averaged $7,200. You should be able to find your own savings if you look at this past years income tax return or W2.
Am I Saving Enough for Retirement?
There is quick back-of-the-envelope arithmetic that should help answer “how much I need to save for retirement.” Let’s go over that first. Then we’ll give financial rules of thumb provided by some financial planners. The first method is good because it deals with your own personal figures. The method uses simple arithmetic to let you know if there is a negative “gap” in what you’ll get paid and what you’ll pay out, or if there is a surplus. If you have a gap, you’ll have to look at what you need to earn in interest on your savings, 401(k), IRAs, etc. to make up for that retirement income gap. If it’s higher than expected interest rates, you may need to save more.
The second method of figuring out how much you need is less personal but should help steer some of your decisions now as you think about retiring