As you approach your late 40s and early 50s, it’s natural to think more about retirement and how life will be in your post-work years. And not surprisingly, money will often dominate those thoughts. How much do I need to retire by 65? Have I saved enough for retirement? Will I be able to maintain my lifestyle when I retire? Will I run out of money after retirement?
These are some questions you’ll find yourself asking, and according to Google, millions of people are making the same queries. So, in this post, we’ll shed some light on how you can estimate an amount that should last you in retirement, and ensure you live a stress-free life. As with most complex questions, no one answer works for everyone. However, there are some guiding principles that, if followed strictly, can help you find a good balance. Some of them are outlined below:
The 4% and 80% rules
Experts typically use two rules of thumb as a guideline for retirement savings. The first one, the 4% rule, requires that you estimate how much you will need to cover your expenses for one year in retirement. Once you arrive at a figure, divide it by 4%. The calculated amount should be adequate for all your post-work years. For example, if you reckon you’ll need $60,000 every year after you retire, you should save up (60,000/0.04), i.e., $1.5 million.
The second rule is very much like the first. The 80% rule presumes that you’ll only need a percentage of your pre-retirement income after you stop work. So, if your income before retiring was $100,000 per year, then 80% ($80,000) of that will be enough to cover your living expenses post-employment. This is done with the assumption that some costs will no longer be necessary once you don’t commute daily to work anymore. Ideally, you’ll multiply that amount by, say 25 to 30 years to arrive at the amount you need to have saved up before retiring.
Keep something aside for emergencies
As good as the rules above are, there are some blind spots. For example, the 4% rule asks that you estimate how much you’re likely to spend every year. But what about unexpected expenses? Say your granddaughter got into her first-choice Ivy League, and you want to contribute to the college fund. Or you want to help your newly married son and his wife with a down-payment for a new home. What happens to your estimates then?
Also, you’ll have more time on your hands in retirement; how about yearly trips with your loved one? How does that affect the estimates? Perhaps most importantly, your retirement years may come with certain emergencies and unavoidable expenses. At 70 years, your health will no longer be what it was at 40. So, you may need to visit the doctor more frequently than before.
Do you remember that the rules of thumb above ask that you estimate how many years you’ll live for after retirement? Not only is this almost impossible to do accurately, but the longer you live for, the higher the chances that you’ll need expensive medical care. These considerations mean that any estimate you do is, at best, wishful thinking.
Investing smartly is the key
From what you’ve read so far, it would seem like the ideal way to approach a retirement savings goal is to estimate how much you’ll spend yearly for about 30 years, then include an extra amount for unexpected expenses and emergencies. That works, but there’s a better alternative: put plans in place to ensure that your income never stops, even when you retire. You can only do this by investing smartly.
And the best part is that you can start now by putting some money aside every month for your retirement account. However, instead of the traditional 401(k)s that are often too rigid to maximize your investment capacity, you leverage retirement savings accounts that offer more flexibility and diversification. Another feature of such accounts is that you withdraw tax-free when you retire. So, you avoid deductions on your precious post-work dollars, and you can better plan your expenses.
If you make the right decisions today, your income doesn’t have to stop with your retirement, you can maintain your current lifestyle, and you don’t need to gamble on how long you’ll live for. To learn more about retirement savings accounts and get started planning the retirement you deserve, book a FREE consultation now with an SEC-registered retirement planning specialist.
