As we’ve been working on improving our finances this year, we’ve been looking at our retirement savings. Even though we’re still in our twenties (barely) and retirement is decades away, we still planning ahead. Part of our motivation has been having some older friends stay at jobs they don’t like because they don’t have enough money to retire.
We’re hoping to develop a big picture plan that will allow us to save for retirement without leaving us financially deprived now. Figuring out how much you need is easier said than done. There are plenty of tips, suggestions, and ideas on the web to get you started.
Since we’ve been running our numbers, I wanted to share some of the thoughts that have gone into it.
Define Your Retirement Goals
One of the things that makes retirement planning difficult is determining exactly what you want out of retirement. There are some important questions that you need to answer before you can determine how much you’ll need to stash for retirement.
- When do you plan on retiring?
- What kind of lifestyle do you want to maintain while retired?
- How long will your retirement money need to last?
- How much (if anything) can you count on from Social Security?
When you do you want to retire?
Retirement means different things to different people. Some people don’t want to stop work; they may just want to cut back on hours and work (for example) as a part-time consultant. Others may be looking at a more traditional retirement, and need to make sure they have a big enough nest egg to live off of for several decades (or more).
Or maybe you want to take a series of “mini-retirements” during the next few decades before take the big one. My husband and I are thinking about moving more toward freelance and location-independent work. While we want to significantly cut back on hours, we probably wouldn’t want to completely stop working as long as we’re able to do something we love.
How much annual income will you need during retirement?
To determine future income needs, you should start by analyzing your current annual expenses. Look at what expenses you may not have during retirement as well as what new expenses you may take on. For example, some people will have paid off their mortgage, or may be planning on downsizing to a smaller home. For many, health insurance will become a much bigger expense later in life.
When we thought about it, we’re looking at needing around $45, 000/year (in current dollars) for our retirement years. By paying down our mortgage, we’re hoping to help lower retirement expenses and give us some peace of mind.
How long do you need your retirement income to last?
I found determining our life expectancy a bit weird. We can’t predict how long we will live, but we can plan based on average life expectancy. According to the US Census Bureau, if you’re a 30 year old female, you have a life expectancy of 76 years (72 years if you’re male). Based on that, we’re estimating around 80 years for both of us, which is a bit longer than the current averages.
After using the spreadsheets to give us a ballpark figure, we’d need around $1.3M if we were retiring right now. That looks like a pretty steep number, so we’re hoping that the power of compound interest will help us out.
Do you include Social Security with your retirement planning?
Many members of Generation X or Y are wondering if Social Security will be around when they retire. While it seems likely that something will be around, the program as it stands doesn’t have enough money to sustain itself. Thus, there will almost certainly be changes. Given the uncertainty, we’ve decided not to count on it.
If there are some benefits when we retire, then we’ll have some extra income to work with and I’m sure we’ll put it to good use. I just don’t want to our plan to require Social Security to be successful — it’s better to be safe than sorry!
Executing the plan
Once you know how much you need to retire, you have to figure out how to fund it. Start by checking your monthly cash flow, and figuring out how much you can afford to set aside for the future.
- 401(k): Be sure to get your employer’s match – my husband gets a 100% match on the first 5% of his salary that he contributes
- Roth IRA: Fund it up to the annual contribution limit – currently $5, 000
- More 401(k): Once you’ve done the above, focusing on maxing out your 401(k) – currently limited to $16, 500/year
I’ve found that automating our investments and savings is the most painless way to keep you on track. If we can pay off the student loans, then we’ll have more money to direct towards the retirement fund.
What about you?
I’d love to hear from you about how you’re preparing for retirement. How soon are you hoping to retire? And how much money will you need?