Retirement Planning Made Simple: 4 Steps to Get Your Head Out of the Sand

An all-too-common approach to retirement planning. Photo: Flickr user blakeimeson.

I get it -- I really do. Sometimes it's just easier to bury your head in the sand and ignore the problems piling up in your life.

Ten years ago, when I began my career as a teacher, there was more than one occasion when I was so overwhelmed I just needed to go home, sleep, and not think about the classroom. As I eventually learned, however, those problems were still waiting for me the next day.

It appears that many of today's workers are taking the same approach to planning their retirements. And yet the solution, though it requires facing the problem head-on, is less painful than they think.

Head in the sand: a common retirement-planning technique
This willful ignorance of retirement planning isn't the result of the dot-com bust or the Great Recession. Rather, it appears to be a trait we Americans have shared for a long time.

The Employee Benefit Research Institute (EBRI) began asking workers a simple question back in 1993: "Have you tried to figure out how much money you will need to have saved by the time you retire so that you can live comfortably in retirement?" Over time, here's what their responses have looked like.

Source: EBRI. 

While there seems to have been a spike in interest in the late 1990s -- probably as a result of huge stock market gains that made retirement planning seem less daunting -- well over half of all American workers have never even tried to calculate the number.

That can lead to serious anxiety about one's ability to cover basic expenses once the Golden Years set in. Though overall confidence has risen since 2009, only 18% of America's workers are certain they will have enough money to live comfortably in retirement.

Source: EBRI. 

That's clearly a problem, yet many of us are choosing to ignore it.

A simple calculation
Just trying to figure out how much you'll need in retirement is pretty easy. In fact, it can be broken down into four simple steps. The result is more of a ballpark figure. For a more specific figure, there's nothing that can replace hiring your own advisor -- more on that in a bit.

Here are the four steps, with my own family's financial situation serving as an example.

  1. Calculate how much you spend per year. My family has spent $57,000 over the past year. This includes everything from housing to food and taxes. In retirement, I actually hope for this number to be lower, as I expect our home to be paid off.
  2. Calculate how much you'll get from Social Security or any pensions. You can find out how much you can expect to get from Social Security by using the Social Security Administration's online Retirement Estimator. Contact your employer for help figuring out pension payments. In my case, my family can expect $3,000 per month -- or $36,000 per year -- from Social Security. Because benefits could be cut by 23% by the time we retire, I'll dial this number down to a conservative $27,000.
  3. Subtract your Social Security/pension payments from your yearly expenses. This lets you know what the gap is between what you'll need and what you'll have. In my case, the gap between these two is $30,000 per year.
  4. Multiply the gap by 25. This assumes you'll be able to withdraw 4% of your retirement savings each year. In my case, I need my retirement savings -- in today's dollars -- to total $750,000.
And that's my "retirement number": $750,000.

Why not grab retirement planning by the horns?
Wes Moss, chief investment strategist for Capital Investment Advisors and host of Money Matters radio show, recently came out with a book titled You Can Retire Sooner Than You Think. In it, Moss takes the results from his extensive survey of retirees and deconstructs the numbers.

Specifically, Moss wanted to identify the traits of people who are happiest with their retirements. One of his key findings was that "happy retirees spend at least five hours a year planning for retirement."  

What do those five hours look like in the real world? In an interview with Forbes' Richard Eisenberg, Moss says:

"Think of it as a total of two hours a year meeting with a financial advisor every six months for an hour each time. The advisor will keep you on track and keep you from making big financial mistakes. Spend another hour on the weekend every couple of months throughout the year maintaining your retirement plans. That's when you ask yourself questions like: 'Are we saving 20 percent a year?' And 'Are we on track?'"  

So that's it: two one-on-one meetings per year and a little elbow grease on the weekends. If finding a financial planner seems daunting, visit the website of the National Association of Personal Financial Advisors, which can locate an advisor near you. Just click on the link and type in your zip code!

You aren't getting any younger, and the sooner you take these simple steps, the sooner you can shake the sand out of your hair and take charge of your retirement.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2014, at 11:42 AM, HarryGr wrote:

    You still have to do the basics to have the best shot at retiring on your terms and to lead the lifestyle you want to lead. Start saving/investing early in life and be consistent (save with every paycheck). Taking advantage of a matching 401k plan should be a no brainer. The power of compounding is lost on many people. Also maxing out contributions when possible, eliminating debt, avoiding risks with your nest egg, planning for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.) and making catch up contributions once you reach 50 should all be part of everyone's plan.. I recently found the site Retirement And Good Living which provides information on all these issues as well as finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics.

  • Report this Comment On August 30, 2014, at 4:53 PM, xanaciowofi wrote:

    Don't be foolish and fall into the trap of trying to measure your wealth by the value of your assets. Markets change. Valuations fluctuate. Instead, measure your wealth by the amount of cash flow your assets consistently generate.

    Here's the path to retire on your own terms, in 7 steps:

    1) Pay off your debts as fast as you possibly can. If this means living in a crappy studio apartment and eating ramen everyday for a couple of years, do it. If you want to buy a car, get a reliable beater. Get insurance for $25/month from Insurance Panda. Forget about buying a house until your debts are paid off.

    2) Once you are out of debt, stay out of debt. The only exception to this rule is a vehicle and a house. If you want to get a nicer car, buy used and be able to pay it off in a year or 2.

    3) If you are going to stay in the same spot for at least 10 years, buy a house, preferably with at least a little bit of usable land. An acre is good, 5 acres is better. Take the amount you are pre-approved for and cut it in half - that's how much you should spend on a house. Come to the table with at least 20% down and make a couple of extra mortgage payments every year. If you're going to be transferred or relocate every 5 years, forget about buying a house and rent instead.

    4) Develop multiple revenue streams. Do contract work. Start a business on the side. Invest in a business as a silent partner. Build websites. Buy and sell antiques. Acquire rental property. Sell something that generates residual income. Learn to play the currency markets or trade stocks. Do whatever you can to generate income from multiple sources.

    5) Grow these multiple revenue streams to the point that they generate enough consistent and reliable cash flow to replace your current income.

    6) Make as much as you can. Save as much as you can. Give away as much as you can.

    7) Retire!- the sooner, the better. Be sure you understand that "retirement" doesn't necessarily mean you stop working, it just means having the freedom to do what you want to do, when you want to do it.

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Brian Stoffel

Brian Stoffel has been a Fool since 2008, and a financial journalist for the Motley Fool since 2010. He tends to follow the investment strategies of Fool-founder David Gardner, looking for the most innovative companies driving positive change for the future.

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