Saving for retirement can be stressful. It’s like running a long-distance race without knowing how far you have to run. Mile marker after mile marker, you wonder when you’ll finish. Are you running fast enough to win? Are you running so fast that you’ll exhaust yourself before reaching the finish line?
Striking the right balance between living comfortably in retirement and saving for long enough is challenging. How can you know how much you’ll need to retire when you don’t know how many years retirement will last? How do you balance today’s needs with an unknown future?
The most crucial part of saving for retirement is to begin. Follow these five principles to start your path to a successful retirement.
The 80% Rule
When evaluating how much you need to retire, consider your current income instead of an overall dollar amount. If you want to maintain your current lifestyle throughout retirement, your monthly income from sources like Social Security, pension, and savings withdrawals will need to equal 80% of your working income.
Account for Inflation
Whatever dollar amount you think you’ll need at retirement is probably not enough. Why? Because it’s important to take inflation into account. Calculating the dollar amount you need each year and multiplying it over thirty years is insufficient because living will get more expensive over time.
To protect your retirement, assume a 3% annual rate of inflation. If you think you’ll need $1 million to retire, you’ll need closer to $2 million to account for the increased cost of goods and services over time.
When evaluating how much you need to retire, consider your current income instead of an overall dollar amount.
The 4% Rule
The median life expectancy in the U.S. is 78.6 years (Kochanek KD, 2017). If you’re married, there’s a 45% chance one of you will live to 90 (Retirement Plans Experience Committee, 2014). With such long life expectancies, planning for retirement early and preparing for a long retirement is more critical than ever. Following the 4% rule will ensure that your nest egg will last.
Experts advise withdrawing only 4% of your savings in the first year of your retirement and adjusting that amount each year to account for inflation. If you retire at 67, the 4% rule will fund you well into your nineties. Coupled with the 80% rule, you are well on your way to preparing for a comfortable and long retirement.
Following the 4% rule will ensure that your nest egg will last.
Debt-free Retirement
Plan to be debt-free when you leave the working world behind to reduce pressure on your retirement savings. Imagine how much more money you’ll have each month if you don’t have to worry about a mortgage, car payments, credit card debt, or student loans. If things get tight when you retire, you can downsize, cut expenses, and live more modestly, but you won’t be able to lessen payments on your debts without increased income. Create a plan with your financial advisor to be debt-free before retirement to reduce the burden on your retirement accounts.
Prepare for the Unexpected
Following the four principles above ensures you should have a comfortable retirement, but those funds can dwindle if tragedy strikes. If you face a chronic or critical condition during your retirement, you may not have the funds to cope with medical bills and maintain your living standard. Disability can limit your mobility and require long-term care that gets expensive quickly. You must protect your retirement investment by preparing for the unexpected. A life insurance policy that offers living benefits can offset the costs of care while you’re alive to maintain your quality of life.
If thinking about retirement savings is stressful, you’re not alone. I believe it doesn’t have to be overwhelming. The first step to creating a workable savings plan is understanding exactly how much you’ll need in savings when the time comes.