This recent government survey tells us that nearly a third (twenty-nine percent, to be exact) of Americans aged 55 and older have absolutely nothing saved for retirement, nor will they be receiving a defined benefit (pension) plan from an employer.
And the median retirement savings amount for those aged between 55 and 64 who are saving for retirement? A mere $104,000. A serious push by the government and by finance experts to encourage people to save heavily for retirement is relatively new, and those who haven’t heeded the advice of experts may be left with no choice but to rely on dismally small social security benefits in order to survive.
Given the current state of Social Security in the U.S. (the Social Security Administration expects that its trust funds will be completely depleted by 2033), that’s not a very secure retirement plan. Are you saving enough for retirement? What measures should one use to determine if they are saving enough, and what plans can one put in place to assure retirement savings are adequate enough to provide for the financial needs of a long retirement?
Today we’ll share tips that will help you be sure you’re saving what you need to save in order to be able to live comfortably during your retirement years.
Determining if Your Retirement Savings Will Be Adequate
How Much in Retirement Funds Do You Need?
Determining how much money you need for retirement is the first step in assuring you’re well prepared financially to afford your expenses during retirement. If you’re living off of a working budget and know how much money you need in order to survive each month, you’ve got a great head start.
If you aren’t living off of a budget and don’t know how much money you need to pay the bills each month, it’s time to change your financial life around for the better by learning how to make your money do what you want it to do.
Well Kept Wallet’s free “How to Create a Budget in 10 Minutes or Less” video is the perfect resource for those who want to start managing their money better, and that budget is key to learning how much money you’ll need in order to thrive during retirement. Or you can use Personal Capital for free to start tracking your expenses and create your first budget. Take some time now to create your budget and then rejoin us here when you’re finished.
After you’ve determined how much money you’ll need to live comfortably during retirement each month, you’ll want to times that number by the number of months – and then years – that you’ll want to have in retirement savings.
For example, if you want to retire at 65 and have enough in retirement savings to last until you’re 90, your retirement fund equation would look like this:
Monthly Budget Amount During Retirement x 12 months x 25 years
So, let’s say that you need $3,000 a month to live comfortably during retirement. Your retirement fund equation would look like this:
$3,000 x 12 = $36,000 x 25 years equals $900,000
If your retirement investment is earning as little as a 4 percent rate of return, your $900k investment will net you $36k a year without you even having to touch your principal balance. With a zero percent rate of return, you retirement account balance will end up at zero after 25 years.
So, in the case of the above fictional scenario, $900,000 will accommodate the retired person comfortably, provided they’re earning interest on their bounty, even if that rate of return is conservative.
Even at half that amount saved, a 4 percent rate of return would net $18,000 in investment income, leaving the retiree with nearly half a million in cash to draw on over the years.
By being conservative with your potential rate of return on retirement investments, and somewhat liberal with how much money you think you’ll need for basic living expenses and potential medical costs, you can get a fairly clear picture of how much money you’ll need to have saved before you retire.
Creating a Cushion for Medical and Other Extras
The thing about retirement is that there are often costs that are higher during retirement than they are in non-retirement. One factor to consider is that of medical costs. It’s important to understand what types of medical benefits you’ll be eligible for during retirement and to plan accordingly to cover any copays and deductibles for post-retirement medical expenses.
Will your employer provide you with adequate medical coverage during retirement? If not, what does Medicare coverage provide and how much cash will you need to supplement the difference?
Extra costs during retirement, whether they be medical costs, housing costs or other extras, should be taken into consideration when determining how much money you’ll need to save before retirement.
How to Get From “A” to “B”
Now that you have an idea of what you’ll need during retirement, it’s time to make a plan to earn that money through smart saving and investing.
A Retirement Calculator will show you if your current retirement savings rate is adequate for your future retirement needs. If it is, great job! Keep up the good work. If your retirement savings is falling short, it’s time to step it up through increased 401k contributions, Roth or Traditional IRA contributions, etc.
I Don’t Have Enough for Retirement!
Did the above calculations show you falling short of having adequate retirement funds? A qualified Financial Planner (get recommendations from friends or family members that are knowledgeable about money) can help you put together a plan for increasing retirement savings.
Another way to increase your financial stability in preparation for retirement is to pay off all debt and create a budget that allows you to put some money into savings each month.
By creating a solid retirement savings plan based on realistic projected expenses during retirement, you can add extra financial security to your retirement years and enjoy living life in retirement comfortably.
Are you saving enough for retirement? What is your best retirement savings tip?