You could end up working for 30, 40, or even 50 years of your life. At the end of that time span, you hope that you'll have a comfortable and enjoyable retirement. But not everyone plans adequately to reach that goal -- a 2020 survey done from MoneyRates showed 62% of people who responded have no clue if they will run out of money.
If you fall into this category, learning whether you're saving enough is the first thing you should do. If you're not, you can give your retirement planning a jump-start by doing these four things.
Image Source: Getty Images.
1. Set a retirement date
If you've gotten a late start with saving and investing, you can get on the right track by setting a retirement date. You don't need to know the exact day, but you should know things like the approximate year or age you'll be.
Once you've done this, you can do some backward planning. For example, if you know that you have 25 years until you retire with the plan to save $500,000, you'd need to stash away $20,000 each year. But if that level of annual savings seems unattainable, this is where investing can help you achieve your goals with a lot less. The table below shows approximately how much you'd need to save each year if your money was invested at different rates of return.
| Average Annual Return | Annual Savings |
|---|---|
| Not invested | $20,000 |
| 7% | $7,500 |
| 8% | $6,500 |
| 9% | $5,500 |
| 10% | $4,750 |
Calculations by author via CalcXML.
2. Look at your future income sources
When you stop working, you'll no longer have wages or a salary, but you'll probably still have bills, which means that you'll need income. One source you'll have if you qualify is Social Security, but on average, this source only makes up about 40% of the average person's pre-retirement wages.
Some lucky people will have a pension, but for the majority, supplemental income during retirement will come from their savings. Studies have shown that keeping your withdrawal rate under 4% once you start relying on those savings can help you avoid running out of money.
This helpful percentage can also give you a good gauge of how much money you should have saved by the time you retire. You can see below just how much you'll want to have saved based on different income needs.
| Annual Income Needs | $10,000 | $25,000 | $40,000 |
|---|---|---|---|
| Savings needed in first year of retirement | $250,000 | $625,000 | $1,000,000 |
Calculations by author.
3. Examine your future expenses
What bills will be the same in the future, and which will be different? Do you have a mortgage now? Will you have one in the future, or will you have paid it off by then? Will your discretionary expenses shift from things like dining out to travel?
Highlighting this information is a great way of finding out whether your income sources will be sufficient. If they won't be, you can start thinking of ways to generate more income or reduce your expenses. You won't be able to eliminate certain things such as future medical costs, but you can plan to keep leisure activities or hobbies affordable.
4. Determine your asset allocation and rate of return
Your asset allocation -- for example, a mix of stocks, bonds, and cash -- will determine how much volatility your portfolio will experience. It will also be the driving force behind the rate of return you enjoy.
The more stocks you own, the higher the rate of return, on average, you can expect. You'll also have bigger gains in good years and deeper losses in bad years. The table below shows what your average rate of return -- along with the returns in your best and worst years -- would be with different asset allocation models between the years of 1926 and 2020.
| Allocation | 100% / 0% Stocks / Bonds | 70% / 30% Stocks / Bonds | 50% / 50% Stocks / Bonds | 30% / 70% Stocks / Bonds | 0% / 100% Stocks / Bonds |
|---|---|---|---|---|---|
| Average return | 10.3% | 9.4% | 8.7% | 7.7% | 6.1% |
| Best year | 54.2% | 41.1% | 33.5% | 38.3% | 45.5% |
| Worst year | (43.1%) | (30.7%) | (22.5%) | (14.2%) | (8.1%) |
Data source: Vanguard.
Taking more risk can lead to higher rates of return, and this can be a way to catch up if you start saving late. But use this strategy only if you feel comfortable with the risks. If you don't, you could find yourself making emotional decisions like selling out of your investments in a panic if the stock market crashes.
You can begin planning for retirement at any age or stage of your life, and no matter how big or small an additional amount you save, it will be more than you currently have. That will help make your goals more attainable and put you one step closer to living the retirement you've always envisioned.
