Two years ago, at the conclusion of my discussion with a client over his finances, I posed this question, “What are some of your long-term financial goals?” His response was one I had heard frequently, “I would very much like to have a comfortable retirement in 20 years.” I followed this answer with an additional question, “What does a comfortable retirement look like to you?” It was at this point that the line went quiet.
How many Americans know precisely what is required for a comfortable retirement, what steps to take to secure it, and are confidently making progress towards that goal?
In its 2012 survey, the Employee Benefit Retirement Institute found that only 14% of Americans responded as being, “Very Confident” about their prospects of having a comfortable retirement.
For me, that number is abysmally low. Last month, we took a closer look at some initial steps to prepare for retirement, such as following a budget, funding an emergency fund and taking advantage of the tax benefits offered through a 401(k) or IRA. This month, let’s examine what questions need to be answered when defining a comfortable retirement, and what’s behind some of the numbers.
Can You Have a Comfortable Retirement?
No doubt at one time or another you have asked yourself what you hope to do in retirement. The answer to this question will affect greatly the amount you need to save. Whether you are traveling the world, playing golf every day at the country club or volunteering in the community, all are different lifestyle decisions that come with varying expenses.
Spend some time outlining what it is you hope to do when you retire and assess what costs will come with that lifestyle. In addition, you will want to answer key questions about your monthly income and expenses.
– Do you plan to work part-time?
– What will your Social Security benefit be?
– Will you have a pension, annuity or rental property?
– Will your mortgage be paid off?
– Do you plan to downsize to a smaller home or condominium?
– Will you have vehicle or student loans?
– Will you have credit card debt?
Look Into the Future
Once you have answered some of these fundamental questions, put together a projected retirement budget. Take your total monthly expenses in retirement and subtract your estimated Social Security benefit (to get a current estimate, click here), in addition to any pensions or annuities you expect to receive.
For example, let’s say after analyzing your retirement lifestyle, you come up with $3,000 as your monthly demand for income to meet expenses. After subtracting $1400 as what you expect to receive from Social Security and an additional $600 pension from your employer, you are left with $1,000 in income you must generate from other sources.
While there are many factors to consider, an approximate guide to go by is that for every $100 a month in income you need to generate, plan on saving $20,000. So in order to generate $1000 a month in income, you need to save $200,000. Sound like a lot of money? As we stated in last month’s article titled Investing for Beginners: A Shift In Retirement Planning, the sooner you start saving, the better chance you have of meeting your goal of having a comfortable retirement.