The Danger of Keeping Things TOO Simple With Retirement Planning

September 14, 2017

With a lot of personal finance, it makes sense to keep things simple or otherwise choose the method that works best for you. Just as the best exercise is the one you’re actually going to do, the same is true for the best budgeting or money management system. When it comes to investing, simple strategies typically work better than more complex ones.

Finding your retirement number isn’t that simple

But while varying money management and investment systems can get you to the same place (saving enough and being properly diversified, respectively), this isn’t necessarily true when it comes to figuring out how much you need to save for retirement. For example, this article I recently read in USA Today called “Simple to complex: 4 ways to find your retirement number” seems to suggest that there are 4 valid ways of figuring out how much to save:

  1. Save 15%
  2. Save $1 million
  3. Save enough to replace 80% of your income
  4. Save enough to fund your projected retirement expense

This advice can be dangerously simple.

Why saving 15% might not be enough

For example, the 15% number is cited in a Fidelity article that uses this as a guideline for someone starting at age 25 and saving until age 67. Let’s put aside all the built-in assumptions about your income, employer match, investment returns, and income needs in retirement. Instead I’m asking how many people reading this article are actually age 25 or younger? 15% may make sense as a default contribution rate for retirement plans since many people getting their first job out of school tend to stick to the default, but it can be dangerously low for someone starting much later.

Why $1 million might not be enough

What about $1 million? Using a 4% withdrawal rate, that would produce about $40k of inflation-adjusted income each year for 30 years. For someone with higher income needs, that may not be enough. For others, it can be such an unnecessarily high bar that they feel they’ll never be able to retire and are discouraged from saving at all.

Taking it to the next level

If you’re going to take the time to calculate how much you need to save in order to reach $1 million, you might as well take just a few more minutes to use a relatively simple but far more effective retirement calculator like this one. If you don’t want to take the time to project your retirement expenses, you can use the third method in the article and simply target an 80% replacement of your current income.

That’s because people typically spend less in retirement on housing (you may have a paid-off home and/or downsize), other debts that may be paid off, children, etc. You also won’t be saving for retirement when you’re retired so you won’t need that income either. While you may need less, few people will absolutely NEED more. (If you’re planning a more lavish retirement, you can always target a higher income replacement percentage.)

Factoring in all the variables

While it takes just a few minutes to use the calculator, it will take into an account variables such as your projected Social Security, pension, and other retirement income, current age, planned retirement age, and current retirement savings balance and contribution rate for both you and your spouse if married. You can also adjust your assumed life expectancy, inflation rate, and investment returns.

By playing around with the calculator, you can see how much any of these variables can drastically affect how much you need to save to reach your goals. You may need to save a lot more or a less than 15% to have a lot more or a lot less than a $1 million in retirement. When it comes to retirement planning, keep it simple…but not TOO simple.

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Is The Financial Tail Wagging Your Retirement Dog?

August 28, 2017

When someone asks you about your retirement plans, is your first thought to check your account balance? That could be holding you back from the life you dream of living in the interim years. Remember that money is there to support your life, not the other way around.

Here are 3 steps to help ensure you’re on track for retirement without letting it rule your life:

1. Forget about the money… for now. Money might limit some of the things we can do today, but it’s still just a tool, not a master. Make sure you’re using it the right way. Since the future is unknown, start by writing down everything you imagine your retirement lifestyle would be if you didn’t have to worry about the money:

  • Where will you live?
  • Where will you play?
  • Will you work or volunteer?
  • Perhaps a little of both, or neither?
  • Who will join you?

Consider the things you like to do and you want to continue doing regardless of your finances.

2. Compare the cost of your ideal retirement to the cost of your lifestyle today. To compare whether your ideal lifestyle will be a reality, use an Expense Tracker to help you review expenses over the last three to six months, then place a “plus” sign next to those you think will be higher (in today’s dollars) in retirement, and a “minus” next to those that will be lower.

Will you save money by not commuting to work anymore? Or pay less state and local taxes if you move? Websites like retirementliving.com and AARP.org offer a plethora of resources to help you with these details.

Now add up those pluses and minuses. Generally, more pluses mean your retirement lifestyle will be more expensive than your current one; and more minuses means it will be less expensive.

3. Run a retirement calculator. Once you have a better idea of what your ideal retirement lifestyle will cost, calculate if you’re on track for your goal or if you need to make up for any gaps. The sooner you know where you stand, the sooner you can make necessary adjustments like saving more, working longer, or re-evaluating your retirement ideals.

4. Make saving automatic. Make full use of your 401(k), which makes saving brainless and painless. If your plan offers an auto-escalator tool, enroll in that to have your contributions increased each year without you having to worry about making the change. To supplement your 401(k), set up a direct deposit from each paycheck into a separate savings account. That way you can relax, knowing that you’re accumulating savings, while enjoying the rest of your earnings to live for today.

Your retirement really is whatever you choose to make it. Let your dreams guide your actions, and you have a great chance at turning them into a wonderful reality.

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