Volume 93 No. 6 - June 2022
Are You on Track to Reach Your Retirement Goals?
Would you trade $33 a day for $3.4M at retirement? $33 per day ($1,000 per month, $12,000 per year) invested from age 25 to 65, earning an 8% annual rate of return, has an ending balance of $3,357,372. While this hypothetical savings plan might be appropriate for this age group of investors, for those that are closer to retirement, determining just how much to save for retirement is a consideration that is top of mind.
If you worry that you have not saved enough to fund your retirement, you’re not alone. According to PricewaterhouseCoopers research, 17% of Americans between the ages of 45 and 59 have saved nothing for retirement, a figure that only decreases to 13% for Americans over 60. Many people have difficulty knowing where to start to calculate how much they will need to retire.
Planning for retirement can be a complex topic. For the purpose of this newsletter, we will focus on three key points to consider for those nearing retirement. A common concern during this stage of life is determining if your portfolio of assets and other streams of income will be able to support the lifestyle you intend to live in retirement. Whether you’re planning for retirement yourself, or know someone else who is, here are some key points to consider.
Determine Annual Retirement Income Needs
One of the key considerations when evaluating if your portfolio of assets will allow you to retire comfortably is determining what you expect to spend in retirement. There is a change of mindset that occurs when retirement saving stops and retirement spending begins. Although it may be difficult to predict exactly what you will spend in retirement, establishing an estimate is a good place to start.
The annual income that you will need to fund your lifestyle in retirement will vary based on a few key factors such as basic living expenses, hobbies, travel, gifts, and others. A common rule for calculating retirement income needs states that retirement expenses will be roughly 80% of pre-retirement spending. This percentage may be less than 80% if, for example, debts are paid in full prior to retirement and may be more than 80% if hobbies and other discretionary spending increase in retirement.
Evaluate Your Portfolio of Assets
Does your portfolio reflect your goals? Investment portfolios are as individual as the people who own them. When Investment Counsel constructs portfolios to meet a client’s needs, many factors are considered—including the client’s age, expected level of income, goals, risk tolerance, values, and lifestyle expectations. We can help you determine how much you will need to save and invest to reach your retirement goals.
Investments typically represent the largest portion of assets that can fund your retirement. Others include pensions, social security, rental income, and even cash savings. When creating a retirement plan, all streams of income should be accounted for.
Do I Have Enough Saved to Retire
One of the most common questions we receive related to retirement is how do I know that I’ve saved enough to fund the retirement I want? While each person’s retirement goals are as unique as the road that has led them there, there are some ways to think about whether you have saved enough.
Using the estimate for annual retirement spending and a projected rate of return for your portfolio, a calculation can be done to project the value of the portfolio over time. One key point to remember is that this calculation is an estimate. Periodic monitoring is critical to an effective plan.
A common way to view retirement savings is the 4% rule. The 4% rule advises those approaching retirement to determine if they could live on an amount equal to 4% of their retirement savings every year. Key considerations in determining to withdraw more or less than 4% will depend on factors such as yearly expenses and amount of wealth desired to leave to heirs. Additionally, inputs such as rates of return and inflation will also affect the percentage of annual withdrawals that is appropriate for your goals and needs.
Another rule states that when at retirement age, the total value of investments should equal eight to ten times annual net take-home pay. That means if your household takes home $100,000 annually, you should have between $800,000 and $1 million in savings when you retire.
No one rule of thumb works for everyone, but these guidelines serve as a good starting point. A customized review of your goals for retirement is an effective way of crafting a plan for retirement.
Plot your course. Know help is here.
Whether you are five, ten, or fifteen years away from retirement, a good plan can help you set the course you need to make the most of your retirement years. This advance planning will help identify the steps needed to achieve the retirement you desire. Establishing and implementing a plan will put you in a good position to achieve your goals.
We are here to help. Planning for retirement can be a daunting task. Investment Counsel can help you walk through the scenarios you may encounter in retirement and create an investment portfolio to help reach your goals.
Since our founding, we have been honored to help clients evaluate their customized retirement portfolios and work toward achieving their individual goals and objectives.
Investment Counsel Inc., a Division of LaFleur & Godfrey, is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.