The No. 1 Question You Have About Retirement Planning, Answered

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Putting money aside today is essential for reaching short-term and long-term financial goals in your golden years. Even if you are waiting until age 70 to claim Social Security, contributing to a retirement account or emergency fund, investing in the stock market and have a financial advisor, knowing how much to save can be confusing, especially when you add in debt management.

If you took a poll and asked Americans approaching full retirement age their biggest retirement planning question, most would say it is knowing how much they will need to save for their nest egg. This, of course, can be problematic if you’re not putting enough aside to support the lifestyle you want and the living expenses you have.

When it comes to this type of financial planning, you may need an expert, so GOBankingRates rounded up some of the best answers to this probing question.

No. 1 Question: How Much Should You Save for Retirement?

According to Chris Urban, certified financial planner (CFP) and founder at Discovery Wealth Planning, not having a specific number to strive for isn’t necessarily an issue with either your income or your expenses.

“Until you know with a fair amount of certainty how much you will be spending in retirement, your goal should simply be to save and invest as much as possible,” he said.

If you’re in your 20s or 30s, with retirement decades away, he said you don’t need to have a dollar amount in mind yet. Even though this might change once you hit age 50, many financial planners would say to start early on focusing on your long-term financial goals. 

“You just need to focus your efforts on maximizing all of the retirement and investment accounts available to you, including any matching contribution(s) that your employer may make on your behalf,” Urban added.

If you’re in your 50s or 60s, he suggested figuring out how much you’ll be spending in retirement first, instead of how much you need to have saved in investment and retirement accounts. This can include assessing your finances from top to bottom, including credit card bills, student loans, Social Security benefits, estate planning, tax brackets and more.

“Come up with a realistic spending forecast for at least the next several years and use reasonable assumptions for years after that,” said Urban. “Then, you can think more holistically about how much you may need to have saved, ways to invest and draw down your assets and to strategize for ways to legally reduce your tax lifetime tax bill, etc.”

How To Calculate Your Retirement Goal

The bottom line is that if you’re ready to calculate a retirement goal to work toward your tomorrow, you’ll need to start saving today. Here’s some expert advice to get you started.

Determine Your Retirement Income Need

“Most families need about 65% to 85% of their pre-retirement income in retirement,” said CFP, Jamie Upson, the owner and senior advisor at Stonehearth Capital Management. “So, if a family is making $100K, they will likely need about $65K to $85K in retirement. Let’s presume $75K for this example.”

Add Up Your Income Sources

Next, Upson said to calculate guaranteed (or pretty reliable) income sources, such as Social Security, pension, income annuity and rental income.

“Let’s pretend these sources add up to $45,000 a year,” he said.

Calculate Shortfall

Your long-term savings may not be enough to last as long as you think, so much so that many retirees end up working part-time or even cashing in their life insurance. Upson said to use the following formula to find your shortfall:

retirement income need – guaranteed (or reliable) income sources = shortfall

“It is the family’s retirement savings that needs to cover this shortfall and will help determine whether or not a family is ready to retire,” he explained. “Based on the family’s age, you can arrive at a reasonable ‘withdrawal rate.’ For someone 60-65, a reasonable withdrawal rate would be 4%.

“If 4% times their retirement savings is enough to cover the shortfall, then retirement is looking good. In this example, a 62-year-old family with $1 million in retirement assets should be able to withdraw about $40,000 a year from their portfolio. In my example, the shortfall is $30,000. So, this family appears to have sufficient retirement assets to retire.”

Adjust for Specific Considerations

“Tailor your savings goal to reflect personal circumstances and preferences,” said Joseph Boughan, a CFP and the founder of Parkmount Financial Partners.

For example, if you anticipate a longer lifespan or hope to retire early, you’ll need to plan your retirement finances accordingly.

Additionally, he said to consider long-term care costs, any home equity you plan to leverage, major purchases you want to make — i.e., travel, a second home, major hobbies — and bequests such as deciding if you’ll leave your money to loved ones or a charitable organization.

Pay Off High-Interest Debt

Saving for retirement while tackling high-interest debt can be a challenge, but this will become even more problematic if you bring this debt into retirement.

“Plan to begin to pay off high-interest debt,” said Nasha Knowles, a CFP and financial professional at Equitable Advisors. “Eliminating your debt will help to reduce financial stress during retirement and increase your cash flow.”

Adjusting for Inflation

Today’s dollar isn’t the same as it will be when you retire. Therefore, it’s important to factor in not only paying off debt but also inflation into your retirement plans.

“You’ll need roughly 20 times your salary in retirement,” said Noah Damsky, a chartered financial analyst (CFA) and the founder of Marina Wealth Advisors.

To adjust your current salary for inflation and what it might be by the time you retire, he shared a few approximations:

• “If you’re 10 years away from retirement, increase your salary today by 35%.”
• “If you’re 20 years away from retirement, increase your salary today by 80%.”
• “If you’re 30 years away from retirement, increase your salary today by 140%.”

He said to multiply your future salary for inflation by 20 times to determine the lump-sum value you’ll need for a healthy target savings amount to amass by the start of your retirement.

Caitlyn Moorhead contributed to the reporting for this article.

Sources

• Chris Urban, Discovery Wealth Planning
• Jamie Upson, Stonehearth Capital Management
• Joseph Boughan, Parkmount Financial Partners
• Nasha Knowles, Equitable Advisors
• Noah Damsky, Marina Wealth Advisors

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