Important Steps to Build Your Retirement Savings
Americans are living longer–much longer. This longevity boom is great news, but it also raises an important dilemma: how much do you need for retirement savings?
According to the U.S. Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84, while a woman turning age 65 today will, on average, live to age 86. However, those are just averages; in addition, about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95. (Source: “Calculators: Life Expectancy,” U.S. Social Security Administration, last accessed October 17, 2016.)
Longevity, for most of us, means more time with our families, more opportunities to enjoy our lives, and the ability to see our kids and grandchildren get settled into their own lives. But on a more practical note, living longer will also require you to set aside more in retirement savings to fully enjoy all those stages of your life, and maybe work more than you had originally envisioned to build your retirement savings.
How much you actually need for retirement depends on many factors, but some of the biggest financial threats to your retirement nest will come from healthcare costs, market uncertainties affecting your portfolio, and overspending.
Here are a few tips which may help you wisely manage your retirement savings and sustain the burden of extra cash during those years when you actually need to be free of financial worries.
Retirement Savings: How Long Do You Want to Work For?
I don’t think there is one-size-fits-all answer to this question. It really depends on how healthy you are, how much you love what you do, and how much you earn and are able to set aside for your retirement savings account.
But irrespective of these factors, studies show that delaying your retirement can drastically increase your savings nest in higher social security benefits, more contributions in your retirement plan, and continued growth in existing retirement savings. For instance, according to Morgan Stanley (NYSE:MS), your retirement savings nest may swell more than 50% if you delay your retirement. (Source: “Preparing for Retirement: What You Need to Know,” Morgan Stanley, last accessed October 17, 2016.)
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Retirement Savings: What Financial Obligations Might You Have?
This is probably the most important factor to consider when you try to nail down how much you need for retirement. And planning for your post-retirement financial needs should start now if you’ve not yet started working on a retirement plan.
The good news is that the biggest financial obligations which a normal working person faces during his or her “work life” are usually dealt with by the time they’re ready to retire. Those obligations include paying down your mortgage, funding the education of your kids, and taking care of your parents.
It’s always better to treat your retirement life as a balance sheet where you clearly put down your potential liabilities and sources of income to fund those liabilities. Some financial planners advise breaking down your retirement age into three phases and planning accordingly.
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The first stage is generally an active stage when you’re physically more capable to enjoy your golden age; this means more traveling, outdoor activities, donations, and the like. The second stage is usually a deceleration phase, where your spending levels decline as you become less active and change your lifestyle preferences. The third phase is a maintenance phase where you’ll likely use your retirement savings much faster as health care costs increase.
Retirement Savings: Bottom Line
You can use your current income as a benchmark for building a portfolio for retirement savings. An 80% replacement rate is a common benchmark in the wealth management industry; that means that if you make $100,000 annually, you would need a portfolio that generates $80,000 in income each year, plus annual increases, to adjust for inflation during your retirement years.
According to Fidelity Investments’ rule of thumb, a worker should aim to save at least 15% of pretax income each year from age 25 to age 67. (Source: “How much should I save each year?” Fidelity Investments, February 24, 2016.)
But I don’t think there is a hard-and-fast rule which can give you an exact number on how much you need for your retirement. One thing is clear, though, and that’s that a disciplined approach to retirement planning, a well-thought-out balance sheet to identify your liabilities, and income generating sources will definitely help you come closer to a number which may be enough to outlive your retirement life.