- Evaluating your current savings and time until retirement is an important first step in retirement planning.
- The average retirement income may not be applicable to you—your personal situation and needs should drive retirement decisions.
- If your retirement savings are falling short, there are a number of steps you can take to increase your savings, no matter your age.
Your current salary and spending can help when it comes to understanding your future income needs in retirement. This is true no matter your age—from millennials to baby boomers. The time left until retirement is a critical factor to consider, but all investors can benefit from assessing their retirement plan.
Generally, the term “average investor” may refer to a variety of ages or salaries—and may not be an appropriate representation of your personal situation. So when it comes to maximizing your household retirement savings, it may be best to look beyond the average statistics and instead focus on evaluating your personal income needs and retirement goals.
Starting with a few basic questions can help you understand what you need to do in order to comfortably retire. What do you currently have in retirement savings? Is your overall retirement plan on track to meet your income needs? How can you measure where you are? You may find out that you don’t have as much as you thought, or that your income needs in retirement could be higher than you initially expected. But following a few tips can help you get your retirement savings back on track.
How Much Do You Need to Retire?
Some investors approaching retirement age may wonder if they are on the right track with their savings. How much money do you personally need to retire?
Here are six ways to gauge whether you are on track.
- Total all your assets: You can’t project your retirement income if you don’t know what you have. Compile all your accounts that will provide retirement income and total them up.
- Determine your annual needs: Take into account all your projected expenses including the activities you aspire to do and expected changes to your cost of living. You may not be able to exactly estimate your retirement needs before you retire, but you should be able to get a general idea.
- Project your retirement withdrawal needs: To avoid depleting your retirement savings, your annual retirement income should be a sustainable portfolio withdrawal rate. For example, if you wish to withdraw approximately 5% of your portfolio per year, divide your required annual income by 0.05 to project the amount you need in retirement savings.
- Figure out (and potentially adjust) your savings rate: If you find your savings aren’t where they should be, don’t worry. There are ways to increase your savings. Make a list of discretionary and nondiscretionary spending, and look for money-saving opportunities. If your salary allows, you may wish to increase or max out your 401(k) and individual retirement account (IRA) contributions.
- Use a retirement calculator: This part of the process can be fun. Enter different investment returns in your calculator to see how a given mix of stocks, bonds and other assets might optimize your returns. You might find that you need to significantly cut your current expenses, adjust your asset allocation or work longer than you expect.
- Take advantage of compounding growth: Assume you will have a long life. Fortunately, compound growth can make a difference when it comes to financial security regardless of your longevity. Even delaying retirement from age 65 to, say, 70 can make a difference in annual savings by allowing your portfolio to continue to grow.
If You Are Still Working
You may have time to make adjustments that could mean make a significant different in your retirement savings. Consider the following tips:
- Spend less.
- Increase your average monthly savings rate for your retirement account.
- If possible, fund your 401(k), IRA or Roth IRA to its annual contribution limit (or catch-up limit for those age 50 and older).
- If your employer matches your 401(k) or 403(b), take advantage of that employer matching program.
- Avoid taking early distributions from your retirement account to maximize time for the assets to grow.
- Delay your retirement date.
- Consider delaying your Social Security benefits. The longer you can hold off taking Social Security, the greater the benefits.
If You Are Nearing Retirement
If you are close to the retiree stage and don’t have enough saved, you aren’t out of solutions.
- You may need to find less-expensive housing in an area where the median cost of living is lower.
- Cut out unnecessary entertainment costs—not all enriching activities carry a high price.
- Most important, rethink your old budget and spending habits; you might not be able to spend the way you did before you retired.
Are You on Track to Retire?
Charting your course from planning to retire to enjoying a comfortable retirement can be complicated. Whether you have questions about Social Security, investment asset allocations or what age you can actually retire, you might consider working with a financial professional.
If you still need help figuring out what you need to do in order to retire, Fisher Investments may be able to help. Contact us today, or download a guide to learn more.