In today’s volatile world, many people lack confidence in the idea of a comfortable retirement. A 2019 survey by PwC indicated that only 37% of employees nationwide believe they’ll be able to retire when and how they want. The primary concern was running out of money. Among baby boomers, confidence was at 49%, slightly less for gen-Xers, and for millennials, the youngest generation surveyed, confidence was at 35%. Since 2019, Americans have faced COVID, volatile markets, currency and weather fluctuations, to name a few uncertainties.
Although the data can be disheartening, the fact remains that the only certain way to not be prepared for retirement is to not have and execute a plan for retirement. If you’re in your 20s or 30s time is very much still on your side; you can leverage it to build a significant retirement nest egg, even from a small amount of faithful saving.
For those with lower incomes, earning 45% of the average American wage and hoping to retire at age 65, Social Security may be seen as a way to replace about half of earnings. A higher earner (someone who earns 160% of the average wage) would want to replace about one-quarter of their earnings. Of course, there are concerns about the future of Social Security because the fund is projected to run dry by 2034, also retirement age is trending later as well. However, Social Security taxes will still be enough to fund about 78% of benefits.
The Long View
It's helpful to view saving for retirement as a journey since. While you will likely have unexpected expenses and income fluctuations over the years, you still need to save. The good news you don’t have to save it all at once. Start by setting some reasonable goals to hit by different age milestones along the way. For example, you could aim to save one year’s worth of your salary by the time you reach 30. worth of your salary by the time you reach 30.
(image courtesy The Motley Fool)
What You Need to Retire
One rule of thumb is to replace 70% of your pre-retirement income. In your planning, factor in your savings, investment income, Social Security and other income sources. Social Security benefits can be found on the Social Security Administration’s website.
You don't need to replace 100% of your pre-retirement income because by the time you retire, you'll likely eliminate certain typical expenses. Examples include:
- Once you retire, you’ll no longer have to save for it
- You may spend less on commuting expenses and other costs related to work
- Your mortgage may be paid off
- You may not need life insurance if you no longer have dependents
You will want to adjust your goal based on the type of retirement lifestyle you’re aiming for. Based on what you are considering, your expenses can differ significantly.
A Retirement Calculator (which you can easily find online) is a starting point. Everyone’s situation is unique with different requirements. Although, retirement planning boils down to earning more, spending less, and making your savings work for you. Your investment income will eventually outpace your active earnings.
Below is a simplistic guideline for how much should be saved for retirement by various age milestones.
· Age 30: One year equivalent of salary | · Age 35: 2 x your salary | · Age 40: 3 x your salary |
· Age 45: 4 x your salary | · Age 50: 6 x your salary | · Age 55: 7 x your salary |
· Age 60: 8 x your salary | · Age 67: 10 x your salary |
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Key Takeaways
- If you’re in your 20s, consider starting NOW however you can. It’s essential to control expenses: 1) Don’t sink money into expensive cars or other “stuff”. 2) Keep your utility bills and other necessary expenses in check by continuously seeking opportunities to decrease monthly expenses. 3) Pay credit off regularly and avoid interest charges.
- Investing at the youngest possible age can provide potential for a large portion of retirement income.
- Start NOW; save each year. The younger you begin, the greater power compounding interest can have for you.
- If possible, participate in a 401(k) plan to get the employer match (i.e., your employer contributes a percentage of salary into your retirement savings). If a 401(k) isn’t available, consider a ROTH IRA or other investment plan.
- The 4% rule is a guide that helps calculate what you will need to save for retirement. Under the 4% rule, you’dwithdraw no more than 4% of your savings each year during retirement. The remaining savings would be invested. The 4% rule can help you calculate how much in total savings is needed based on an expected annual income in retirement.
- Retirement planning begins now and can be summarized in three disciplined practices:
1) earning more,
2) living at or below your means while spending less, and
3) making your savings work for you.
Contact a Strategic Stewardship Financial Advisor for more ideas and the guided support you need to realize your retirement goals.