C. Eric Christiansen, CFP®
How much should I be saving for retirement? Am I on track for retirement? What is my number? These are questions we hear clients ask all the time in the financial planning business. Not wanting to make a poor judgment call, pre-retirees can easily work themselves into a panic given the wide range of saving strategies to choose from and with no clearly defined, one-size-fits-all answer.
This article demystifies several common retirement savings strategies and will help you better identify what fits your situation.
The 10 percent rule
A good rule of thumb is to save a minimum of 10 percent of your gross income for retirement. This can easily cause confusion, though, because Person A making $250,000 per year and Person B making $100,000 per year would be saving vastly different amounts under the same guideline. But how can both be right!?
There are two factors behind this rule of thumb. First, it takes into consideration that people earning more money typically spend more money. It’s not all being socked away into savings.
Generally speaking, those with higher incomes are more likely to take on larger mortgages, have higher car payments, incur greater monthly credit card debt, etc. The person making $250,000, therefore, needs to save more for retirement simply because their lifestyle is more expensive—and likely will continue to be in retirement.
The second deciding factor behind this percentage has to do with the metrics of a healthy budget. It is widely accepted that you shouldn’t spend more than 30 percent of your monthly gross income on housing. The idea is that you shouldn’t spend so much of your income on housing that you can’t afford to eat, buy gas, or insure your car.
Likewise, the 10 percent rule for retirement savings is high enough to make a meaningful impact over time but low enough to avoid unneeded strain on your monthly cash flow.
What If I Can Do More Than 10 percent?
While saving 10 percent of your gross income is the baseline goal, aiming beyond 10 percent as your career progresses is highly recommended. It’s important to note that 10 percent is a general benchmark, meaning it is the number that can best apply to the widest range of income earners. However, high-income earners, or those highly motivated to retire early, should instead aim for 12-15 percent or higher.
This is typically feasible, too, since you are likely to have more discretionary income in your 40s and 50s than in your 20s, right out of college. And after all, there is no downside to saving more; it simply gives you more flexibility in the future.
Let’s say you are saving 12 percent comfortably on a monthly basis, but you wouldn’t mind pushing up the dial a bit. There is, in fact, a strategy you can consider for increasing your savings without dipping any further into your discretionary income. That strategy is debt consolidation and reduction.
Whether it be consolidation of multiple credit cards, refinancing a mortgage, or paying off a car loan, the end result is a lower monthly line item in your budget for debt repayment. You can then redirect that “extra” money toward your savings goals without any impact on your current discretionary spending.
This is just one example of the many ways you can go about boosting your savings efforts and one of the strategies our Spokane, WA fiduciary financial planning firm commonly reviews with clients. We recommend discussing your retirement savings goals with your financial planner to better identify the right tools and solutions for your situation.
Finding Your Magic Number
By now, you likely realize why there are so many different answers to the question “What is my retirement number?” As much as we’d all love a one-size-fits-all solution, your magic number will be different from the next person, and that simply has to do with your lifestyle and the hobbies you plan on enjoying in retirement.
To home in on your retirement number, it’s important to consider these questions:
- How much am I living on right now?
- When you calculate your monthly bills and discretionary spending, how much does it cost you per month?
- Do I expect my living expenses to change in retirement? If so, by how much?
- Do your retirement dreams include a move? More travel? Added hobbies? How will these costs affect your living expenses?
Retirement goals fall onto an incredibly broad spectrum. Some people, for example, decide to downsize their homes and simplify their lives. They might sell their larger home and use the funds to buy a smaller square-footage home, paying it off outright. Others will decide to buy secondary residences where they can travel to throughout the year.
This second group should expect their living expenses to increase in retirement, while the first group might see costs decrease. Both groups are living out their dreams, but if they’d each been making $70,000 pre-retirement, you can easily see how the second group would need to have a larger nest egg saved up.
Start saving today! It is never too early or too late. When it comes to how much to save, 10 percent of your income is a great place to start, but aiming higher is always in your best interest.
To determine your total retirement savings goal, you should first consider what your dreams for the future include and understand how those will affect your spending habits. This will give you a good base number to work from in terms of the annual income you’ll need to pay for the lifestyle you want.
While it is always a good idea to seek professional financial planning advice along the way, these tips are excellent first steps on the road to retirement planning.
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