Recently, a client asked, “Will I be able to enjoy dream trips and continue to fly first-class at retirement?” Of course, everyone’s retirement vision is different, but the definitive question remains – “Will I have enough money in retirement?”
To answer that question, we need to break it down to determine if you’re on the right track: How much money will you need? How much do you expect from reliable income streams?
What’s your retirement dream? That vision weighs heavily on determining how much income you will need in retirement. How much spending money will you need in retirement?
Keep in mind, some major expenses may go away or be reduced by retirement – like a mortgage or contributing to your 401(k) plan. Of course, some expenses may increase – like travel, health care and home improvements.
Consider creating a detailed budget to analyze your ‘Needs’ (food, housing, health care, etc.) and ‘Wants’ (vacations, first class flights, entertainment, etc.) that will impact your dream retirement.
Now determine how much income you can count on in retirement. How much do you expect to earn from Social Security, pension, savings, rental income or other sources? Go to www.ssa.gov, set up your free account, and receive an estimate of your social security benefit.
Tally up earnings that you expect from pensions, rental income, and other income sources. (Do not include your savings, 401(k), or other retirement accounts). For example: Let’s say your retirement income goal is $250,000 per year. Your social security benefits will be $70,000 per year ($35,000 per year for each spouse) and rental income is anticipated to be $30,000 per year. This means your savings (investments, IRAs, 401(k)s) will need to produce $150,000 per year. $70,000 social security + $30,000 rental income + $150,000 savings = Your goal of $250,000.
We recommend that you work with a Certified Financial Planner ™ professional to develop a personal retirement plan. But to get a general idea of how much you’ll need, multiply the amount desired from investments in your first year of retirement by 25. In our example, if you need your savings to produce $150,000 every year to supplement your social security and rental income, multiply $150,000 times 25. This equals $3.75 million. Your retirement savings portfolio value will need to be at least $3.75 million to provide the money you need over a 30-year retirement.
Now that you’ve done the math, are you on track to meet your goals? If not, what can you do now to course correct? Try finding ways to increase your savings.
- Max out your retirement accounts: If you’re age 50 or older, in 2020 you can contribute up to $26,000 to a 401(k) and up to $7,000 in an IRA. Earmark bonuses, raises and tax refunds for retirement savings.
- Stay flexible: Work a few extra years to help preserve your savings, consider working part-time in retirement, or delay Social Security benefits. After attaining full retirement age, if you delay collecting your benefits, the amount will increase 8 percent every year until the age of 70.
Refine your budget. Prioritize ‘Needs’ and ‘Wants’ today by paying down debt and putting your savings on automatic. Scrutinize your spending and find money from your ‘Wants’ to put towards retirement savings. At retirement, eliminate or reduce ‘Wants’ to lower your income needs. Are you staying in first-class? Or will coach be OK?
“Will I have enough money at retirement?” is an important question to ask early and revisit periodically. A financial plan can help you evaluate your retirement assumptions and create a realistic road map. A financial planner can be your coach and help you make changes or corrections to your plan.
Disclosure: The opinions expressed herein are those of HawsGoodwin Wealth, LLC and are subject to change without notice. Nothing in this material should be construed as an offer to purchase or sell any product or security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Contribution limits may fluctuate from year to year. HawsGoodwin Wealth reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.