Planning Your Future Retirement
We’ll run through Some basics of retirement financial planning and rules of thumb to help you get there
Welcome to the comprehensive parent's guide to retirement planning.
Just kidding, this won’t be that serious.
We view this post more as a place to get you started; just some tips to think about.
Regardless of how you get going, retirement planning is vital for your peace of mind and the key is understanding how much you'll need for retirement in the U.S. and how it compares to your current income.
The below is meant to be a quick read and we'll try to make these rules of thumb easy and enjoyable, ensuring you're off to a good start preparing for your golden years.
Crucial Step: Estimating Your Post-Work Monthly Needs
Planning for retirement hinges on this key question: How much do you need each month after retiring? Without this number, it's like setting off on a journey with no map.
You wouldn't know how much to save, invest, or rely on from pensions.
While we can't predict your lifespan precisely, we can get a pretty good estimate of what you'll require month-to-month in retirement.
Experts often suggest aiming for around 70% of your current monthly expenses during retirement. But remember, everyone's unique.
Some of you are naturally thrifty, capable of living on less, while others cherish the idea of "living large."
Also remember, whether you're a saver, a spender, or somewhere in between, it's smart to anticipate rising costs in retirement. Healthcare costs, in particular, can become a concern.
If you want to start estimating your monthly costs in a bit more detail we have a handy downloadable excel template here.
How To Map Out Your Retirement Fund
If you're currently making $100,000 annually in your peak earning years (let's say in your 50s and 60s), you'd want around $70,000 per year for a comfortable retirement using the broad guidelines above.
If you've paid off your mortgage and your kids have flown the nest, this number could drop even lower.
And if you plan to retire at 65 (a well-rounded number!), with a 20-year retirement ahead, this math works out to you needing approximately $1.4 million.
However, let's also consider some external factors.
Remember, what age your retire at is significant in the U.S. – Social Security benefits will vary.
The maximum Social Security payment in 2023 is around $3,627 per month (there is a question of how long the government will be able to afford this but let’s not go there today).
That's a good boost for your retirement fund! Just keep in mind that eligibility criteria apply.
Retiring earlier, say at 55 or 60? Or think 20 years is too little? Brace yourself – you might need a bigger retirement stash (statistics do show that many folks live well past 85, making it essential to have a solid financial plan in place).
So maybe you want to adjust some of the assumptions above and go back and take a second look.
Other Ways to think about it
Beyond the 70% rule, there are other tricks that some people tend to follow if you want to go a different route.
There is also the 4% withdrawal method, favored by some financial experts, which involves building a portfolio that allows you to withdraw 4% annually.
If you need $60,000 yearly, that translates to $1.5 million in savings. This method can adapt to early retirement dreams too if you just get to a figure that allows you to live on 4% of it annually (and again, you can customize these assumptions all you want).
Lastly, another approach involves looking back at your peak earning years and multiplying your income by 10 to 14 for a very rough estimate.
Final Thoughts…
Regardless of what method or method’s you choose, your retirement journey starts with estimating your costs. So go ahead, take a look at your monthly spending and try to use some of the tactics above to get some ballpark numbers around your own retirement.
Remember, you can always consult a financial advisor for real help here (or if you want to talk to other financial professionals we have a handy guide on what each person does here).
The last point we would make is that if you have loved ones depending on you, we would also check out our discussion on life insurance and trusts vs. wills.
