Putting money aside today is essential for financial stability in your golden years. Even if you are contributing to a retirement account, knowing how much to save can be confusing.
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Nearly one-third — 31% — of Americans have no retirement savings goal, according to a recent survey conducted by GOBankingRates. This, of course, can be problematic if you’re not putting enough aside to support the lifestyle you want.
However, Chris Urban, CFP, RICP, founder at Discovery Wealth Planning, said not having a specific number to strive for isn’t necessarily an issue.
“Until you know with a fair amount of certainty how much you will be spending in retirement, your goal should simply be to save and invest as much as possible,” he said.
If you’re in your 20s or 30s, with retirement decades away, he said you don’t need to have a dollar amount in mind yet.
“You just need to focus your efforts on maximizing all of the retirement and investment accounts available to you, including any matching contribution(s) that your employer may make on your behalf,” he said.
If you’re in your 50s or 60s, he said to start figuring out how much you’ll be spending in retirement first, instead of how much you need to have saved in investment and retirement accounts.
“Come up with a realistic spending forecast for at least the next several years and use reasonable assumptions for years after that,” he said. “Then, you can think more holistically about how much you may need to have saved, ways to invest and draw down your assets and to strategize for ways to legally reduce your tax lifetime tax bill, etc.“
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8 Steps To Figure Out How Much Money You’ll Need in Retirement
Ready to calculate a retirement goal to work toward? Here’s some advice to get you started.
Assess Your Current Financial Situation
Planning for tomorrow largely depends on where you’re at today.
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“Take inventory of your accounts to see what you’ve accumulated thus far, but most importantly ask yourself at what age do you desire to retire and what is your desired lifestyle during retirement,” said Nasha Knowles, CFP, a financial professional at Equitable Advisors.
Create a Detailed Budget
If you don’t currently have a budget, Knowles said you need one, and preferably one that’s interactive.
“You also need to have an income statement and a balance sheet, which can help you understand all of your income sources — or potential sources — and to take inventory of all assets,” she said. “This also helps you know your discretionary income or to identify what expenses can be reduced or eliminated to create one.”
Pay Off High-Interest Debt
Saving for retirement while tackling high-interest debt can be a challenge, but this will become even more problematic if you bring this debt into retirement.
“Plan to begin to pay off high-interest debt,” Knowles said. “Eliminating your debt will help to reduce financial stress during retirement and increase your cash flow.”
Create a Retirement Budget
It can be hard to envision now, but Knowles said to estimate how much of your current income you think you’ll need in retirement — i.e., 60%, 80%, 120%, etc.
“The amount you need is dependent on the lifestyle that you want to live,” she said. “A rule of thumb suggests that most Americans should aim for about 80% of [their] current income.”
She said the 80% estimate is based on the idea that you may have fewer expenses and debts than you did in your working years.
Identify Fixed Income Sources
You’ll likely have a certain amount of fixed income in retirement, so figure out what exactly this amounts to.
“Begin by calculating your monthly income from fixed sources in retirement, such as Social Security, pensions or annuities,” said Joseph Boughan, CFP, owner of Parkmount Financial Partners. “This establishes your baseline income.”
Determine Additional Monthly Cash Needs
Having a fixed income to rely on in retirement is great, but you’ll probably require more than that.
“Estimate the monthly amount you’ll need from savings to supplement your fixed income,” Boughan said. “This includes regular expenses, discretionary spending and unforeseen costs.”
Calculate Required Savings
“Multiply your additional monthly cash need by 300,” Boughan said. “This formula assumes a 4% annual withdrawal rate from your investments, suitable for sustaining a 30-year retirement period.”
He said this approach factors in drawing into a small amount of the principal over time, which might be necessary, depending on your spending needs and investment performance.
Adjust For Specific Considerations
“Tailor your savings goal to reflect personal circ*mstances and preferences,” Boughan said
For example, if you anticipate a longer lifespan or hope to retire early, you’ll need to plan your retirement finances accordingly. Additionally, he said to consider long-term care costs, any home equity you plan to leverage, major purchases you want to make — i.e., travel, a second home, major hobbies — and bequests such as deciding if you’ll leave your money to loved ones or a charitable organization.
Adjusting for Inflation
Today’s dollar isn’t the same as it will be when you retire. Therefore, it’s important to factor inflation into your retirement plans.
“You’ll need roughly 20 times your salary in retirement,” said Noah Damsky, CFA, principal at Marina Wealth Advisors.
To adjust your current salary for inflation and what it might be by the time you retire, he shared a few approximations:
“If you’re 10 years away from retirement, increase your salary today by 35%.”
“If you’re 20 years away from retirement, increase your salary today by 80%.”
“If you’re 30 years away from retirement, increase your salary today by 140%.”
He said to multiply your future salary for inflation by 20 times to determine the lump-sum value you’ll need for a healthy target savings amount to amass by the start of your retirement.
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This article originally appeared on GOBankingRates.com: Many Americans Have No Idea How Much They Need To Save For Retirement: Here’s How To Figure It Out
