Top Tips 2021 – How much do you need to save for a “successful” retirement?
Article provided by Jason C. Gaynor Investment Services, LLC
A successful retirement—it is something we all desire, yet many of us spend as much time planning for retirement as we do planning for our next root canal.
Why do we fail to plan? We don’t know where to start; it is intimidating, and feels like a dauting task. Before long, years pass, and our “plan” becomes “ugh, I’ll never be able to retire.” We are all human, and for some, procrastination runs in our blood. Few of us wish to spend time addressing a subject we do not understand well.
The reality? Putting together a plan is NOT a daunting task, particularly if we start early. Many of us are fortunate that our employers offer to us an Employer Sponsored Retirement plan—a 401K. This provides an avenue to defer a portion of our salary for retirement. The problem—how much do we defer? Should it be five percent of our pay or three percent? How much do you truly need to set back in seeking to provide for a successful, happy retirement of travel, relaxation, and leisure—while addressing your concerns about the fear of running out of money?
I am often asked these questions, and the good news is that there are easy calculations to help. An old rule of thumb—setting back 10% of our pay for retirement—can be adequate if one starts early enough. Here is a case study:
35 year old with an annual income of $50,000
- Retire at age 65
- 2% annual salary increase
- 10% of income deferred into 401K
- Employer match of 3%
- Average annual rate of return in 401K: 7.5%
401K value at age 65: $853,574
401K value at age 67: $1,012,069
This individual, at age 35 starting at $0, began saving 10 percent of their pay, achieved an average return of 7.5 percent annually, and by age 65, their account was worth over $850,000. If they keep going to age 67, the value exceeds $1,000,000.
(Calculator Source: https://www.dinkytown.net/java/401k-calculator.html)
For many, seeing over $1 million in their retirement account would be a tremendous accomplishment—and for this individual, who is used to an income of $50,000 per year (after 30 years, assuming two percent annual inflation, the inflation adjusted income level is $90,000 per year) this is a respectable amount of savings.
What we do not know is “how much income will this generate per year? Will it be enough to last the rest of my life?” Another old rule of thumb is that one can invest their savings in the market, and sensibly withdraw five percent of the value, per year, without potentially depleting their savings. Meaning, this individual, at age 67, could sensibly withdraw $50,600 per year without potentially depleting their savings.
$1,012,069 x 5% withdrawal rate = $50,603
Coupled with Social Security income of approximately $24,000 per year (yes, you paid in for it, so currently we must assume you will be returned your money you paid in,) this individual has a plan that could provide nearly $75,000 per year of income.
How realistic is it that this will provide a “successful” retirement? As with anything else, beauty lies in the eye of the beholder. For many individuals, replacing 83 percent of their pre-retirement income and having plus/minus $1,000,000 of liquid savings—this is success.
Some of us will continue to work in a reduced role/consulting position during retirement. Others will save 12 percent of their pay instead of 10 percent. We are all different so design a plan that fits you and your goals. The first step, for all of us, is simply to start saving.
Saving becomes a habit. Even if we start at only saving three percent of our pay, we start to watch our statements, we see our savings grow, and we save a little bit more. The “mountain” begins to look smaller, and the task less daunting. Even if your employer does not offer an Employer Sponsored Retirement plan, most financial advisors can establish your own self-directed IRA in a matter of minutes—many IRAs can be started with as little as $50/month on a bank auto-draft.
On the surface, planning for a successful retirement can seem challenging, but don’t be fooled—as long as one has the willingness to save, there is a plan for you.
Jason C Gaynor, Wealth Manager offering securities through LPL Financial, Member FINRA/SIPC
*Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
**This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. Investing includes risks, including fluctuating prices and loss of principal.