Learn More About Long-Term Financial Goals
The biggest long-term financial goal for most people is saving enough money to retire. The common rule of thumb that you should save 10% to 15% of every paycheck in a tax-advantaged retirement account like a 401(k) or 403(b), if you have access to one, or a traditional IRA or Roth IRA. But to make sure you’re really saving enough, you need to figure out how much you’ll actually need to retire.
Estimate your retirement needs
Oscar Vives Ortiz, a CPA financial planner with PNC Wealth Management in the Tampa Bay/St. Petersburg, Florida, area, says you can do a quick back-of-the-envelope calculation to estimate your retirement readiness:
Estimate your desired annual living expenses during retirement. The budget you created when you started on your short-term financial goals will give you an idea of how much you need. You may need to plan for higher healthcare costs in retirement.
Subtract the income you will receive. Include Social Security, retirement plans, and pensions. This will leave you with the amount that needs to be funded by your investment portfolio.
Estimate how much in retirement assets you need for your desired retirement date. Base this on what you currently have and are saving on an annual basis. An online retirement calculator can do the math for you. If 4% or less of this balance at the time of retirement covers the remaining amount of expenses that your combined Social Security and pensions do not cover, you are on track to retire.
Highest initial withdrawal rate for retirement that has survived all historical periods in U.S. market history, assuming a diversified portfolio of stocks and intermediate government bonds.4
If, for example, you started with a portfolio of $1 million and withdrew $40,000 in year one (4% of $1 million), then increased the withdrawal by the rate of inflation each subsequent year ($40,000 plus 2% in year two, or $40,800; $40,800 plus 2% in year three, or $41,616, and so on), you would have made it through any 30-year retirement without running out of money. “This is why you often see 4% as a rule of thumb when discussing retirement,” Vives Ortiz says.
“In most scenarios, you actually end up with more money at the end of 30 years using 4%, but in the worst of the worst, you would have run out of money in year 30,” he adds. “The only word of caution here is that just because 4% has survived every scenario in history does not guarantee it will continue to do so going forward.”
Ortiz provided the following example of how to estimate whether you’re on track to retire:
A 56-Year-Old Couple Who Wants to Retire in 10 Years
Desired annual living expenses $ 65,000
Spouse No. 1’s Social Security at age 66 $ (24,000) $2,000/month
Spouse No. 2’s Social Security at age 66 $ (24,000) $2,000/month
Remaining needs (to come from investments) $ 17,000
Total investments needed to fund remaining needs, assuming a 4% withdrawal rate ($17,000/.04) $ 425,000
Current 401(k)/IRA balance (combined, both spouses) $ (250,000)
Additional savings needed over the next 10 years* $ 175,000 ($17,500/year; or about $1,460/month)
*For simplicity, we have not included the rate of return that would be earned over the next 10 years on the current investments.
Increase retirement savings
For most people who have an employer-sponsored retirement plan, the employer will match a percentage of what you are paid, says CFP Vincent Oldre, president of Assured Retirement Group in Minneapolis. They might match 3% or even 7% of your paycheck. You can get a 100% return on your investment if you contribute enough to get your full employer match, and this is the most important step to take to fund your retirement.
“What kills me is that people do not put money into their retirement plan because either they ‘can’t afford to’ or they are ‘afraid of the stock market.’ They miss out on what I call a ‘no-brainer’ return,” Oldre says.
Michael Cirelli, a financial advisor with SAI Financial in Warrenville, Illinois, recommends making IRA contributions at the beginning of the year as opposed to the end, when most people tend to do it, to give the money more time to grow and give yourself a larger amount for which to retire.