The toughest part about planning for retirement is dealing with the unknowns. When the big event is decades away, it's impossible to know things like how long you'll live, what sort of mental and physical health you'll be in, what the stock market will do, what inflation will be like, and even whether or not Social Security will still be paying out benefits.
Unfortunately, none of these questions can be answered with any certainty until it's too late to dramatically refine your saving and investing plan. However, with a solid plan that gives you the flexibility to handle life's curve balls, you can dramatically improve your chances of retiring with a portfolio that will keep you comfortable in your golden years.
With that in mind, here are three steps to help you set the foundation for a solid plan -- one that you can adjust as life happens.
1. Set a savings target
Think about what you want to do when you are retired. Will you travel? Move from the suburbs into the city? Become a local philanthropist? Pursue a new or part-time career? Next, put a price tag on your lifestyle -- the amount of money you'll need each year to cover your expenses. It may be a wild guess -- or you can simply start with your current income -- but putting a number down on paper is where you have to start.
Once you have your estimated monthly expenses, subtract from that your anticipated net Social Security check and any monthly pension payments you may get, then multiply the remainder by 300. This is a rough number that tells you how large your total portfolio will need to be to cover your costs. At that size, your portfolio should generate enough growth and income that you can take advantage of the 4% rule, a solid (if rough) estimate that will help reduce the odds that you'll outlive your money.
While that estimate of 300 times monthly expenses may seem daunting, there are a number programs available to help you build your nest egg faster, which leads us to the next step.
2. Take advantage of every savings plan at your disposal
Start with qualified retirement accounts like IRAs, 401(k)s, 403(b)s, and the government's Thrift Savings Plan. These plans let your money grow tax-deferred, or potentially tax-free, and depending on the type of account, you may even get a tax break immediately for putting money into the account. Another bonus is that many employer-sponsored plans offer a company match for some portion of your contributions. Depending on your tax situation and the level of the match you get, it may give you the opportunity to instantly double your money, which will go a long way.
Of course, if you haven't been saving, it's hard to go from $0 to $1,000 per month in savings overnight. Don't get discouraged. Instead of an all-or-nothing approach, focus on what you can start with right now, and then ramp up if you're able to reduce your spending or increase your income over time.
The table below looks at the monthly contribution needed to reach $1 million by retirement depending on different returns and time frames. As you can see, it's important to get started as quickly as you can, even if you can't spare the total right away:
|
Years to Go |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
40 |
$158 |
$286 |
$502 |
$846 |
|
35 |
$263 |
$436 |
$702 |
$1,094 |
|
30 |
$442 |
$671 |
$996 |
$1,441 |
|
25 |
$754 |
$1,051 |
$1,443 |
$1,945 |
|
20 |
$1,317 |
$1,698 |
$2,164 |
$2,726 |
|
15 |
$2,413 |
$2,890 |
$3,439 |
$4,064 |
|
10 |
$4,882 |
$5,466 |
$6,102 |
$6,791 |
|
5 |
$12,914 |
$13,610 |
$14,333 |
$15,083 |
Data from author's calculations.
3. Be flexible and adjust as needed
Building and maintaining a nest egg is a long-term commitment. Between now and retirement (and beyond), life happens, and when it does, be ready to make course corrections to reach your goals.
Let's say you are 10% shy of your savings goal when you reach retirement age. You can remedy that by working another year or two in order to give your money more time to grow (and perhaps increase your Social Security benefit, too). Or maybe you decide that you're ready to retire earlier than you planned. In that case, you could consider downsizing your home and lowering other costs in order to retire a few years earlier.
The point is, as you evolve, so should your retirement plan. By following the steps outlined above to build a solid savings foundation, you'll better be able to call the shots as you work toward the golden years you've dreamed of.
