Personal Finance Essentials
Retirement Planning
46% of Americans Have Zero Retirement Savings
You Can Fix That
in Three Steps
This is perhaps the most challenging of all financial planning issues, for two reasons. First, it’s the most expensive goal to meet; the money people spend in retirement dwarfs the cost of everything else. Second, retirement is the only financial planning goal that must be prefunded.
You see, you can pay for a house while you’re living in it. You can pay for a car while you’re driving it. And you can pay for college while you’re earning money in your career. But you can’t pay for retirement while you’re retired – you must set that money aside before you get there.
This is why saving for retirement out-prioritizes all other goals. That’s a shock to parents, who believe it’s their responsibility to save for their kids’ college before saving for their own retirement. (Those parents are simply forcing their children to financially support them throughout their retirement.)
Fortunately, retirement planning is simple – just a three-step process:
STEP 1
STEP 2
STEP 3
Say you spend $8,000 per month. Some of those expenses will vanish by the time you retire – college costs for the kids for example, and commuting expenses associated with work. But you’ll incur new expenses in retirement – such as travel, spoiling grandchildren, and your own medical bills. So, it’s best to assume you’ll need as much money monthly in retirement as you do now.
Let’s also assume that you and your spouse combined will receive $5,000 monthly from Social Security. That means you need to fund the remaining $3,000 of your expenses. That’s $36,000 per year. Multiply that by 25 and you have the answer: you need $900,000 in retirement assets. With that nest egg, you’ll be able to withdraw 4% per year — $36,000 – to maintain your lifestyle.
This quick math has a few safeguards built in:
• It ignores the value of your home, which can be accessed should a financial need occur.
• People tend to spend less as they age, making it likely that you won’t need the full $8,000 monthly for your entire lifetime.
• Withdrawing 4% annually means you don’t have to touch the principal. Your account is likely to earn more than 4% per year, meaning the balance will rise over time. And the money remains available – and will pass to your heirs if you don’t spend it.
Once you determine the amount you need to accumulate, you can create a savings strategy to achieve the goal.
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