Saving for Retirement: Another Take on How to Plan
If you have recently visited any one of the many personal finance blogs on the web, you have most likely seen or read an article on how you should be savings for retirement. After reading a few of these articles, I figured it was time to offer up another point-of-view. One that focuses on your needs and not a big fat number.
Saving for the future can be hard. People love to live above their means, and in most cases putting that cash away for a later date can be rough. For those looking to get a sense of what they need to survive after 40 years of employment, should not be surprised to be presented with a seven-digit number. A norm among calculators, planners and even some financial institutions, such as ING Direct, is their quest to hitting your number is a main campaign focus.
I get it, that final number is easy to comprehend, but what this mystical number lacks is the understanding is how much money you will need to live happily once you are in your 50’s and 60’s. For instance do you plan to eat out 5 times a week or go on insane shopping sprees every month? What about when your children move out, are you planning on downsizing?
Some experts assume these calculators overestimate. While earning anywhere from 6-8 percent per year on your investment seems fair and realistic, there is no denying that we have experienced two market meltdowns and reaching for that huge number became almost unattainable. An experience our baby-boomer generation is quite aware of, as they saw the market collapse and their retirement portfolio with it.
Retirement Goal Setting
What if we walked away from this number one goal and considered the option of setting goals based on an achievable benchmark. A benchmark that still allows you to live a comfortable life today and tomorrow.
Last year a study released from the EBRI (Employee Benefit Research Institute) found that in June of 2009, only 40.6 percent of all families included a participant in an employment-based retirement plan with their current employer.
I point this out, because there are two main factors to saving and planning for retirement:
- Ability to control your spending habits leading to hitting savings goals quicker
- The more you save, the less you have to rely on the market
How to Achieve those Goals
Therefore my first recommendation is to definitely take advantage of any employee retirement plan options that are available to you. If you are lucky enough that your employer is able match up to a certain percentage, shift your spending habits to max it out. You will see quickly that this is a no brainer – don’t miss out on free money. The return is better than any deposit account.
Continue to look for opportunities to avoid having to rely on the market. That way if the market drops, your wealth is protected. Other way to do this is by maxing out the allowable amount on an IRA each year ($19,500 or $6,000 if you are under the age of 50).
But let’s be honest for a minute, while saving a percentage of your annual income may be realistic for the first few years, it becomes difficult to accomplish when you introduce mortgage payments, 529 college savings plans or any other scenario that requires a large investment.
This is why starting early is the key factor to any retirement plan. Avoid waiting till you have a massive salary, or believe you can part with cash. In most cases as your income goes up so will your spending and this now takes us back to my first point, “Ability to control your spending”. If you are able to set budgets and control your spending you can introduce a life that is enjoyable and fun while still investing into your future.
They estimate that retirees spend 4% of their savings each year. Therefore if you need to spend on average $35,000 a year you would need $875,000.00. Having the ability to control your spending will adjust that big number considerably.
While everyone’s vision of a comfortable retirement is different, knowing that the more you save leading up to retirement makes relying on the market easier, look at your spending habits to make that scenario a reality.