Retirement is a phase eagerly anticipated by many individuals, offering a chance to unwind, explore the world, or engage in hobbies that were once put on hold due to work and other responsibilities. However, ensuring a comfortable and financially stable post-retirement lifestyle often requires years of careful planning and saving. It’s never too early to begin setting aside money, even if it’s just a small amount. Your future self will undoubtedly thank you for it.
If the prospect seems daunting, there’s no need to worry. The best way to embark on this journey is by asking yourself some fundamental questions about your retirement goals and the ideal timing. Let’s help you get started.
Determining Your Retirement Fund
When it comes to estimating how much you’ll need, one reliable guideline is to assume that you’ll require approximately 80% of your current pre-retirement income during retirement. Shweta Lawande, lead adviser at Francis Financial in New York City, which provides financial planning and wealth management services, suggests this approach. The pre-retirement period refers to the time when you decide to retire and select your retirement date.
Factors Influencing Your Retirement Needs
Since the amount of retirement savings needed varies from person to person, it’s crucial to have a clear understanding of your current financial situation in relation to your retirement aspirations, as highlighted by Lawande. Additionally, you should consider the financial support required for loved ones and family members, along with potential medical expenses.
In particular, medical costs can be unpredictable, so it’s important to factor in the expenses associated with procedures or medications, even if you’re currently in good health. If you plan to travel, enjoy leisure activities, or pursue expensive hobbies during retirement, it’s advisable to save extra funds for these “more flexible, discretionary expenses,” as suggested by Merrill. Another rule of thumb to bear in mind is the 4% rule, which allows retirees to withdraw 4% annually from their financial portfolio for a period of 30 years, adjusting for inflation over time. This can help you assess whether your investments are sufficient and can sustain you throughout your retirement years.
When Should You Start Saving for Retirement?
To ensure optimal savings for retirement, it’s best to start as early as possible. If you have a full-time job, it’s time to consider saving. Lawande recommends setting aside 10% of your income for retirement and gradually increasing the percentage over time. On average, Fidelity estimates that you should aim to save around 15% of your pre-tax income each year, including any employer match, assuming you’re saving between the ages of 25 and 67. “It may seem challenging for individuals that young to think about retirement, as it feels so far away,” says Lawande. “However, having those additional years for your money to grow can prove to be invaluable.”
The Best Investment Strategy for Retirement
While saving for retirement is crucial, investing for retirement is equally vital, emphasizes Lawande. Investing allows your money to grow through interest, appreciating stocks, and dividends over time. By investing early, you can achieve your financial goals with relatively less cash, thanks to the power of compound interest.
Compound interest, often referred to as “the most powerful force in the universe” by Albert Einstein, occurs when you earn interest on your interest. For instance, if you have $100 that earns 5% interest annually, you will have $105 in the first year and $110.25 in the second year. Although it may seem like a small difference, it accumulates significantly. This is why, if given the choice between $1 million or a penny doubled every day for 30 days, you should opt for the penny. By the 30th day, that humble penny would be worth several million dollars.
“Consider your investments,” advises Lawande. “Let them work in your favor, especially when you have time on your side, both before and after retirement.”
The Realistic Amount Required for Retirement
There is no fixed number that applies to everyone when it comes to retirement savings; it entirely depends on the individual. As you plan for retirement, several key questions need to be addressed to determine the appropriate savings target for you. According to Lawande, these questions include your intended retirement age, a comparison of your current expenses with your expected retirement expenses, and your current retirement savings strategy.
“For those contemplating how much they need to retire, especially those approaching retirement age, I highly recommend working with a financial adviser to create a customized plan for saving and spending during retirement,” advises Lawande.
Written by Jarred Politarhos