Friday, November 6, 2015

How Much Do I Need to Save for Retirement?

This is the question that I hear all the time: How much do I need to save for retirement? I answer that question with a question: How much are you going to spend?

Your spending  decides how much you will need. It's one of the reasons that you should be tracking your expenses every month. It will give you an idea of what you spend. It will also show you where you can cut expenses.

I believe that you shouldn't retire with any debt: no mortgage, no car payments, no credit card debt, and  definitely no college loan debt for your children. Those payments have ruined many a retirement plan.

After you have tracked your expenses a few months, look them over really well. Which of those expenses will you have in retirement? Add up everything that you believe you will spend in one year in retirement. Then multiply that amount by 25-50 years. If you are retiring really early then use closer to that latter number of years.

I know no one knows how long they will live but you have to estimate it to make sure you have enough saved so that you won't run out of money. 

For example: Lets says you have realistically determined that you will need $25,000. per year to cover your expenses. You want to retire at 55 years of age. Your family history has shown that your family lives into their 70's. I would multiply $25,000. by 25 years of retirement. So this tells you that you will need a total of $ 625,000. If you want an early retirement at 40 or 50 then just multiply the $25,000. by those number of years. Your money  should be invested so that you are making money on it. 

Why do I use this formula? Because history has shown us that 4% percent is the safe withdrawal rate each year. It is the maximum rate at which you can spend your retirement savings and not run out of money.  Safe Withdrawal Rate

I know that you are thinking what if the economy is bad like it has been for the past 7 years. Well that is when you tighten up the budget a little and weather the storm. I know health care will go up and that we will have some inflation eventually even though it is has been at historic lows according to our government. I show you the Trinity Study because it is the only evidence out there that a 4% safe withdrawal rate will work best. Account in your savings and investments for the fact that we could have another period of 7-8 years like we have had these past years and save extra. 

We invested in stocks by buying mutual funds. I don't know about you but I am not a great stock picker. So we have used Vanguard Total Stock Index funds for years and that has worked well for us. You don't need a high commissioned stock broker to pick your stocks for you. They just pick your pocket with commissions and fees.  Only you can decide how you want to invest your money. But for the past 7 years interest rates on savings accounts and even CD's have been at historic lows. They barely pay 1/2%. When you need 4% or more, that 1/2% is not going to get you there.

That said, if you are not a risk taker, then you are going to have to use a lower withdrawal rate per year or save more money. Many seniors over the past few years have cut their withdrawal rate down to 2-3 % to weather the storm. If you are really worried about the 4% withdrawal rate, then save more money. Save 5,6, or 7%. Only you can determine what rate makes you comfortable. But you always have to be cognizant that when your money is in the stock market, you run a risk of losing it. So as you age, you should be rebalancing your portfolio to less risk.

We have a lot more money in investments than we will need but we wanted to account for a period of high inflation. We wanted to make sure that we could weather the storms. We lived through the 1980's when inflation was in the double digits. Our government tells us there is no inflation but that is because they don't take into account food costs. We all know that our food costs have skyrocketed over the past few years.  We also are always cutting our costs so that we can continue to save money every month. Only you can determine what you will save to make sure that you are comfortable with your retirement. I can only point out the Trinity Study that people have used for years to determine what they need in retirement. 

Many seniors have bolstered their retirement savings by taking part time jobs. But you can't count on that since in your old age you may not be healthy enough to work a part time job.  

To sum up, figure out what you need to save and then just do it. I know it's not easy but not having enough money in retirement for the basics of housing, utilities, property taxes, food, transportation and healthcare will definitely not be easy. Just ask any senior who has to decide between buying food or their meds monthly. As you saw in our October Expense Report, healthcare and food were two of our highest expenses.

Disclaimer: I am not a stock broker or even a financial planner so I can't determine what investments you put your money in. I can only tell you what has worked for us and about the Trinity Study. You have to make your own investment decisions. 

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