4 steps for a successful retirement savings plan

4 steps for a successful retirement savings plan

Retirement Savings

Are you dreaming of the day when you can finally retire and leave the working world behind? You’re not alone. After committing to a career for many decades, retirement is a long-awaited milestone. But have you thought about how much money you’ll need to comfortably support yourself during your golden years? It’s a question that requires careful consideration, planning, and a bit of humor too.

According to a 2022 Gallup survey, the mean age for retirees in the US is 61. If you were to live to 85, this means you’d need enough money to cover all your expenses (and retirement goals) for at least 23 years. Oh, and don’t forget about factors like inflation, which will certainly have an impact on your savings over time.

While it would be easy to just throw out a generic figure, the fact is your individual retirement savings target will be very different from your siblings, your neighbors, and even your co-workers’ goals. That’s because the amount you’ll need depends on a few key personal factors.

But there is one important rule of thumb that applies to everyone: The sooner you start saving, the less effort you’ll need to put into reaching your goal, and the better positioned you’ll be later in life. So, let’s dive into the four important steps you can take to determine just how much money you’ll need to save.

1. Calculate how much you’ll need to save during retirement

Understanding what you expect retirement to look like will help determine how much you’ll need in order to fund that lifestyle. If you plan to travel the world in luxury, your budget will be a bit different than someone who just wants to birdwatch from the backyard each morning.

In retirement, your savings will cover many of the same expenses that you had prior to retirement. These include: – Food – Shelter – Transportation – Clothing – Gifts – Utilities – Insurance (including a health plan) – Travel

If you don’t plan for any of these categories to change much from pre- to post-retirement, then you should have a good idea of your budget. However, if you have big plans for your retirement years, it’ll be important to determine how much your new standard of living will cost.

More and more seniors are going into retirement with lingering home mortgage expenses. If your home will not be paid off by retirement, be sure to account for this monthly expense in your savings.

Also, be sure to account for unexpected expenses that could come up, such as medical care for you and your spouse or even helping a child or grandchild financially.

Next, consider where you plan to live. You may want to downsize, or you might plan to buy your dream retirement home. Either way, be sure to factor in all those costs.

Don’t forget to consider inflation and the impact this will have on your savings. For instance, in 2022 alone, there have been inflation rates of 6.5%, following the 7% inflation increase in 2021. While this is well above average, you should account for inflation of approximately 2% per year.

2. Break down how much you should be saving each year

Now that you have an idea of how much you’ll need, you can begin calculating how much you should be setting aside annually.

One simple way to determine your savings goals is to aim for a multiple of your current annual earnings. While the actual amount varies according to your projected retirement costs and even the specific investments you choose for your retirement portfolio, these serve as a rough target and give you a better sense of where you stand.

According to Fidelity, here’s how much you should have saved up each decade in order to meet your retirement goals:

Age Savings Goal
30 1x your annual salary
40 3x your annual salary
50 6x your annual salary
60 8x your annual salary
67 10x your annual salary

To reach these targets, many financial advisors, planners, and asset managers suggest a dedicated savings rate of 15% of your annual income. However, you may need to save even more, depending on what retirement will look like for you, what sort of financial obligations you expect to have in retirement, and your current assets.

The sooner you start saving, the easier it will be to compound your savings and reach your goals by the time retirement arrives.

3. Consider other sources of income while retired

There are multiple savings vehicles and income streams to consider for retirement. These can affect how much you need to save today, depending on which sources of income are available to you.

  • Social Security benefits are offered to retirees aged 62 or older (or those who become disabled or blind), who have earned enough credits throughout their career to qualify for the program. This can provide a steady income stream in retirement.

  • A pension plan can also provide you with a steady, monthly income stream. If your employer has one, you’ll need to ask if you qualify, how much income this will offer, and what the pension requirements are.

  • Annuities are another retirement income source to consider. They’re offered by insurance companies and act as a long-term investment vehicle. After purchasing an annuity, you will receive regular payments over the course of your retirement.

  • A 401(k) is one of the best retirement savings plans. These employer-sponsored investment vehicles allow you to save and invest as much as $22,500 per year in 2023 — or as much as $30,000 if you’re over the age of 50 — toward your retirement. The money in a 401(k) can be invested in a variety of different securities, and your contributions may even be matched by your employer, amplifying your efforts.

  • An IRA, or individual retirement account, can be opened at any number of financial institutions, including banks, credit unions, and brokerages. There are two primary types: the traditional IRA and a Roth IRA. Each offers its own tax advantages, depending on your specific situation.

There are other plans and investment options available, but these five are the most common among retirees.

4. Know the general rules of thumb when planning for retirement

While everyone’s situation and needs will be different, there are a few primary rules of thumb that most financial advisors follow, which you should consider when determining how much to save for retirement.

  • Retirement income as a percentage of pre-retirement income: Many financial professionals recommend that you account for between 70% and 80% of your pre-retirement income each year in retirement. This means that if you currently earn $60,000 per year, you should plan to spend between $42,000 to $48,000 annually once you retire.

  • Saving 15% of your earnings every year: If you start saving for retirement early enough, an annual savings rate of 15% may be sufficient to meet your goals. If you’re off to a late start, you may need to save a lot more each year to catch up.

  • Saving 10 times your income by retirement age: Many financial advisors and firms like Fidelity recommend having approximately 10 times your annual salary saved by the time you reach retirement age. While this may not be exactly what you need, it’s a good target to keep in mind as you go.

  • The 4% rule: This rule states that retirees can withdraw up to 4% of their retirement savings in year one of retirement. While many factors can affect the actual drawdown process, the 4% rule can be a good place to start if you want to avoid running out of money.

Saving for retirement is different for everyone, and there is no one-size-fits-all approach. Everyone’s needs will be different, and so will their approach to saving, including when they start and how much they can set aside each year. Consulting with a certified financial planner or other retirement expert is really the best way to understand your unique needs.

Remember, “planning ahead and checking in on your efforts” is key to saving enough for the retirement years, as Jim Ludwick, a CFP founder of MainStreet Financial Planning, Inc. advises. “If you want to stay independent, do your homework ahead of time. Think about all those things that could possibly happen. If they don’t happen, you’re lucky … and your kids and grandkids can have a nice gift that you leave behind.”

In conclusion, saving for retirement requires careful consideration, planning, and a good sense of humor. By calculating your retirement savings target, breaking down your annual savings goals, considering other sources of income, and following some general rules of thumb, you can pave the way to a comfortable retirement. So, start saving today and make your retirement dreams a reality!