Many people who read these posts are not in retirement mode, but they should be. Let us face the facts that many of our parents and grandparents worked for a single company for the majority of their careers. And in many instances, our parents may even be enjoying a pension in their retirement years in addition to any savings that they may also have accumulated to go along with their Social Security. But for people in my generation and younger the way of the pension may very well be as real as a unicorn unless you are one of the lucky ones who work for some sort of government or a large traditional company that still has pensions for its everyday worker. But yes pensions are on their way out as companies have shifted since the 1980s towards having employees fund their own retirement through the use of 401(k) plans. By doing this, companies were able to shift the long-term liability of a pension to the employee’s self-funded 401(k), and they get a tax deduction if they match all or a portion of the contributions. But how do you know if you are on track for a prosperous retirement?
It is estimated that about 60% of Americans feel good about what steps they have taken to prepare for their retirement. These people believe that they are saving enough to generate enough of an income for them to live when they do in fact retire. But many of these people are kidding themselves, and they are not doing enough to ensure a prosperous retirement. So where are they going wrong?
Of that 60% who feel confident about their retirement plans about 45% even know how much they have saved for retirement. If that is the case how in the world can someone feel confident about what they are saving for their golden years if they have no idea how much it is that they have saved? 35% of these same people have bothered to calculate how much income that they will be receiving per month in retirement. That means like the number of people who know how much they have saved a majority has no idea what their monthly income will be. And nearly 40% of these people are not saving enough of their annual salary to prepare for retirement by saving 10% or less properly. And perhaps the worst statistic is that almost 30% of those who are not yet retired have saved anything for retirement. These are real and extremely scary facts and figures when you stop to think about it.
So what do you need to do? First, you need to know where it is you stand, and the only way to do that is to take an inventory of your assets and liabilities just like you were a company preparing a balance sheet. This personal balance sheet needs to be reviewed at least annually but ideally on a quarterly basis. In today’s age of technology, you can even use free sites such as www.mint.com to track your assets and liabilities for you, and they can even lead to helping develop an all-important budget. Because if you do not know where your money is going how in the world will you know what you can and cannot afford to save? If you desire a budget tool, I recommend a set of Excel Spreadsheets on my site in addition to selling a basic spreadsheet that can be used to budget a normal household under “Financial Tools.”
Now that you know what your balance sheet and budget look like you can estimate what your retirement income might look like. What makes up your retirement income you ask? It is any stream of income you will have once you retire such as interest payments, dividends, annuities, a pension if you are one of the lucky ones who will receive one and of course your Social Security benefits. Add all of that up and see what percentage of your current salary will be replaced in retirement. If you are at, say 70% and your goal is 80% you will need to save some more to achieve your target percentage. Otherwise, you will be forced to possibly sell some of your portfolio to make up the difference. But as a rule, people expect to withdraw about 4% of their portfolio on an annual basis to pay towards their retirement income.
As I alluded to previously many are not saving near enough to ensure a proper retirement. If you are like most and you do not expect a pension you should be saving at least 15% of your annual salary in a retirement account be that a workplace 401(k) or an IRA. Ideally, you are saving some in both types of accounts but always take advantage of any employer match in a 401(k) as that is an instant profit and free money to you. If you cannot afford 15% start where you can and put any raises or unexpected income into your retirement account. If you start at say 4% in the beginning and get a raise go ahead and adjust your percentage to say 5% and do that every year until you reach 15%.
Every little bit extra you can save will lead you to a better retirement because compounding over several decades can make a huge difference. If you do not believe me go to the “Financial Tools” tab and scroll down to the retirement calculator and plug in different amounts, returns and lengths of time before you retire. Take note of the differences and start there for your target goals. As you cannot count on anyone to assist you when you retire, it is never too early to start preparing as soon as you can.
If you need additional information, please contact me directly or like to leave a comment.
