Sixty-three percent of pre-retirees believe they won’t be able to retire by age 65 (GoBankingRates). To compound this issue, the #1 stressor for retirees is not having enough money invested. In fact, 58% of people believe they will run out of money (Barrons).
Depending on your age, retirement might seem far away. However, if you want to retire on time, you have to start now! First, let’s understand why it’s more difficult to retire now vs. let’s say, 30 years ago.
From my experience, there are three main reasons for this.
Pension Plans
In the past, many employers offered “defined benefit pension plans” aka pensions. These plans basically guaranteed retirees a specific income based on their years of service and final salary. They’re less common today with many employers shifting to “defined contribution plans” like 401(k)s—which place more responsibility on employees to save for their own retirement.
Social Security
Social Security benefits have been a significant source of income for retirees in the United States. While the program still exists, there are concerns about its long-term sustainability due to an aging population and changing demographics. Some argue that Social Security benefits may not be as generous for future retirees.
Longer Life Expectancy
People are generally living longer today, which means that retirees may need more savings to support themselves over a longer retirement period. This can make retirement planning more challenging.
Given these challenges, you have no choice but to take your own retirement into your own hands.
The two questions you need to evaluate so you can live your best life in your golden years are: How much do you need for retirement and How much are you contributing currently?
How Much Do You Need For Retirement?
Anytime you are investing, you want to invest with the end goal in mind. When evaluating how much you need for retirement, you’ll want to know your projected annual spend in retirement.
Why is this important? Once you retire, you’re basically cutting off your income streams and you are living off your investments. Given that, it becomes critical that you understand how much you are spending since you’ll be on what retirees call “a fixed income.” That means your income is fairly set and thus your spending has to be in check.
To find out what your projected annual spend might be in retirement, the general rule of thumb is 70% of your pre-retirement income at retirement. For example, if you make $60,000 a year, your annual spend in retirement will likely be $42,000 or $3,500 a month (pre-tax).
Next, you will want to understand how many years you will need the income after retirement.
This may be a tough question to think about for many reasons. For one, you are basically asking yourself how many years after you retire do you think you’ll be alive. The second reason why this question is difficult is because no one actually knows. To get a ballpark number, you’ll want to take certain data points like the longevity of older family members, family health risks, average longevity for Americans, etc.
Once you understand your projected annual spend in retirement and projected longevity, try using an online calculator to help you figure out how much you need to have invested by retirement age. Warning: this number might be way more than what you thought initially but that’s okay. This number will serve as a starting point.
The second question you’ll want to evaluate is how much you should be contributing to reach that retirement number.
How Much Should You Be Contributing?
To find that out, you’ll want to back into that number by understanding how much you are investing currently and your desired retirement age. Normally when people are evaluating how much they are investing currently, they look at the percentage of their income they are contributing to their retirement. For example, if you are making $60,000 a year and you are contributing $7,000 to your retirement, people will say “I’m contributing 11% to my retirement”.
From there, you can use a similar retirement calculator to figure out if your current retirement contribution amount is enough.
If you feel like you’re not investing enough and this was confirmed by using the calculator above, consider investing in your employer’s retirement plan (e.g. 401k, 403b, etc.) if they have one and taking advantage of the employer match. Your employer match is when your employer basically rewards you for making contributions to your retirement by matching a percentage of your contributions. For example, they may say that they will match your contributions up to five percent. So, if you put in 5% of your income, they will match that 5% with their own 5% (so 10% in total). This could be a huge boost to your retirement savings and help you get closer to your retirement number.
Additionally, you can leverage other retirement plans like IRAs and business retirement accounts to boost your retirement savings beyond your employer retirement plan.
In a world where many people are worried about not being able to retire by age 65, and where financial stress during retirement is a top concern—it’s clear that taking action now is crucial. The key is to take control of your retirement now, no matter your age, so you can enjoy your golden years worry-free.
