Are you around a decade from retirement? Do you think you have saved enough for your retirement? These are some serious questions that many baby boomers as well as younger people ask themselves every day. While there is no one answer for everyone there are some steps that people who are nearing retirement can take to save additional money. It is never too early to take a look at your savings to see if you are on track to reach your retirement goals. In fact the sooner you examine your situation the better off you and your family will be.
Many financial planners and people think that they will need approximately twelve times their annual salary to fund their retirement needs. While this is a good rule of thumb it is by no means a one size fits all for everyone. In fact, the twelve times your salary works fairly well for a couple that earns about $100,000 a year and will need to replace between 80% and 85% of their income. Obviously the less you need to replace the less you may need to save and conversely the more of your pre-retirement income you need to keep the more you will need to save. For higher wage earners it is recommended that you save upwards of sixteen times your annual salary depending on your circumstances and possible needs. Unless you can project how much of your pre-retirement salary will actually need to be replaced in retirement you are saving blind with no real idea of how much you will actually need.
One way to determine how much you will need in retirement is to have a well-defined budget now to see what expenses you will in fact still have after you retire. Some expenses will remain such as utilities, some insurance, a possible mortgage though I hope not for your sake, and some big expenses of your annual income that should not be a main part of your retirement are social security taxes and well as your income taxes. Once you have your budget that shows all of your income and expenses for at least six months you will be in a better position to determine what your post-retirement replacement of income will be. In many instances I think you will find that what you will actually be in retirement may be lower than what you expected.
So here are some tips to help you save some additional money as you get closer to retirement. In the event your house is paid for and you have no mortgage there may be little reason to sell and move unless that is what you really want to do. If you are like many retirees you may have a house that is larger than what you actually need but if you do not want to move and you are able to maintain the house it may be a benefit to keep your current house as your family and eventually grandchildren may need the space when they come visit you. If you can sell your house at a good price level and can buy a smaller house where you intend to retire that is definitely a sound decision and one each couple must make on their own. If you do not have a mortgage there may be little incentive to sell and downsize. If you do have a mortgage still it may make more sense to indeed sell and downsize into something that you can use the equity from your current house to pay cash for and eliminate the mortgage entirely.
For most now that you are entering retirement you will experience an empty nest so to speak as by now your children should be grown and out of college. If you aided your children in their college expenses now that they are out of college you will have an excess of money that will not be an expense in retirement. Instead of spending this money try to save it instead. When most of us no longer have children in college we start to spend these funds on something else and it makes perfect sense to continue to save these funds for your retirement. As you have been spending this money on a worthwhile expense continue to do without using it and save the money in a retirement account or brokerage account. They key here is to save these funds and not spend them on something else.
Another way to save some extra money for retirement is to spend less on a favored low cost pleasure. When we are younger we want and desire the more expensive items and luxuries. People like to take the expensive trips abroad when they are working and while they are young enough to enjoy the experience of physical exertive trips. When we are older we opt for trips that are closer to home for the most part. Skip the international excursions and opt for dinner out, a visit to a museum, or a trip to a national park. While I am not saying do not travel or take nice vacations it is just as we age our list of places to visit is likely to be more practical.
And finally the way you approach your investments can save you some money as well. Many people will pay higher fees for actively managed mutual funds that can cost 0.8% or much more in management fees. While these funds may outperform the market from time to time I do not know of any fund manager that consistently outperforms the market on a long term basis. Here in my opinion it is better to get a low cost indexed fund for about 0.2% or less depending on the index you chose and pocket the difference and let it earn additional money for you. While it may not seem like much this small difference can equate to about $4,500 or more in additional fees on a $750,000 account. Now I am not sure about you but I would prefer to keep that money for my use and not pay some fund manager.
While everyone is different these are some basic tips that can lead to additional savings for you and your family. Again not everyone needs to save the same amounts or multiples of their annual salary. But these are some good rules of thumb to go by. Again do a budget and see what your need will be then estimate a return on your money and also an estimate on how long you will need it to last. With this information you will be in a better position to save for your retirement.
Contact me if you have any questions or need any additional assistance.
