Yes, it’s true: you can retire… as long as you properly plan for it. That’s often the issue; most people have the ability to have a happy retirement, they just lack the willingness to plan for it.
What’s your number?
No, not your phone number… You’ve probably seen TV commercials or retirement books talking about your number; it’s the cumulative amount of money, or your number, which you will need in order to have a financially satisfying retirement. It’s not all that difficult to calculate what your number is; simply determine what your expected overhead is and multiply by the number of years that you expect to be in retirement. OK, maybe that’s too difficult to project; you don’t know with certainty what your expenses will be, maybe you’ll be a world traveler who needs more money than average, you don’t know whether your home will be paid off, etc.. Given that there are a great many uncertainties, here’s an even simpler way to determine who much money you should have before you retire, courtesy of John Ameriks, head of Vanguard’s investment counseling and research group: People shouldn’t get too comfortable until they have a number that’s 12 or more times their current salary, so $600,000 for $50,000.
This is just a ballpark estimate, but it’s a good place to begin, especially if you are like most people and aren’t interested in doing a lot of, or any, financial planning. The 12 times current salary approach is an easy way to estimate how much you’ll need; if you are currently earning $75,000 a year and you are able to live reasonably comfortably on that salary, then you probably need to have $900,000, or 12 times $75,000, to retire; if you are fortunate enough to be earning $150,000 a year and you are able to live reasonably comfortably on that salary, then you probably need to have $1,800,000 to retire.
Determining your number is the easy part; saving the money to allow you to achieve that happy retirement, now that’s the daunting part. Most people have nowhere near enough money to retire; further, most people believe that there’s no way they could ever be able to amass that much cash. The Federal Reserve estimates that the average American family headed by someone aged 55 – 64 only has $104,000 in retirement savings. Fidelity Investments, earlier this year, indicated that the average balance for all account holders was $91,300.
There are many variables involved in determining how much money you need for retirement. The biggest variable is your longevity; how long are you going to live? If you knew you were going to die soon after you retired, you probably wouldn’t need all that much money; your Social Security benefits and your savings might satisfy your needs. But people are living longer today than ever before. The average life expectancy for a 65 year old today is about 85. That’s just the average; about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95. You need to anticipate that you might need to have enough money to last potentially 30 or 40 years in retirement.
You can save for retirement
It’s actually easier than you might think; the more time you have, the easier it gets. You know that cup of coffee you buy every morning? What if, instead of purchasing a $5 cup of coffee every day, you made your own coffee at home, put the $5 in a jar and at the end of the month, you’d have about $100 – 20 or so work days each month times $5 a day.
What if you took that $100 and invested in an S&P 500 index fund; every month, $100. At the end of one year, you would have invested $1200. If you did that for 40 years, you would have almost $350,000! That assumes an 8% return, which is a reasonable long term expectation. Yes, this isn’t enough to satisfy the average American’s need for about $600,000, but it’s well over half the amount that you need. If you save more than that, you can easily reach your goal. It’s easy to save more than that; you are likely already doing that by investing in your company’s 401(k) plan or your own IRA.
In this example, where are you investing just $100 a month, your total investment over those 40 years would be just $48,000. Incredibly, your money would have increased from under $50,000 to nearly $350,000 mainly because of compounding. That money was amassed as a result of saving just $5 a day; I’m sure there are other ideas that you can come up with to save an additional $5 day to double that $350,000 total. How about brown-bagging lunch instead of eating at a restaurant? How about taking mass transit one day a week instead of driving and saving gas? Buying fewer clothes; not buying the latest technology, like phones, computers, and TVs, etc. These are just a few ideas; there are many more easy ways to save money.
Here’s another more conservative scenario assuming an annual market return of just 7% instead of the 8% we used in the prior example. A 30-year-old worker who earns $30,000 a year and received a 3% annual raise could retire at age 70 with $927,000 simply by saving 10% of his or her wages every year in a passive index fund. The more time you have your money invested, the more money you will have when you need it most, during retirement when potentially your only other income source will be your Social Security benefits.
It’s truly amazing; the more time you have to continually invest, the more money you will have later in life. Here is a truly incredible fact about Warren Buffett, one of the wealthiest men in the world. His net worth is $63 billion, but $62.7 billion of which was added after his 50th birthday, and $60 billion came after his 60th. How? Easy! Compounding: When things grow exponentially, gains might look tiny at first, and then modest in the middle, and suddenly — very suddenly — they shoot utterly off the charts. It’s truly astounding to think that 99% of Buffett’s wealth happened during the 30+ years after he turned 50. Buffett didn’t need most of his net worth when he reached retirement age; he’s giving most of his money to the Bill and Melinda Gates Foundation. For the rest of us, the answer is to start as early as you can; the longer you wait, the more money you will need to invest. If you wait too long, you will not be able to retire in the lifestyle that you have become accustomed to.
If you are like most people, you did not start early. If you want to have a successful retirement, you will need to take stock of your situation; determine how you can spend less, how you can save and invest more and make a realistic concerted effort to do so. Whatever your number happens to be, make a plan to invest your money. Start as early as you can. Invest as much as you can. You can reach your goals, it just takes time and discipline.