How Much Do I Need to Retire? Am I Saving Enough?

The truth is, probably not! Most Americans have not saved nearly enough to maintain their standard of living in retirement. Furthermore, only a small minority of working age families have taken the time to develop a realistic retirement plan. Unfortunately, when it comes to our financial futures, failure to plan is indeed planning to fail. Investing decisions we make (or fail to make) today will, without fail, determine the quality of the life we will lead tomorrow. Those who plan carefully for their futures can choose to live in a state of financial freedom. Those who choose not to plan and save are in effect choosing a retirement lifestyle of dependence and want.

Where does it come from? Fewer and fewer Americans are covered under traditional pension plans. The rest of us are left with 3 potential sources of income: Retirement savings accounts (401k/IRA) home equity, and of course, Social Security. If you are accustomed to earning $80,000 per year, perhaps SSI will contribute $30,000 – that means you need another $50,000 per year in retirement income from the other 2 sources.

What about inflation? Increasing costs of fuel and medical care will both hit seniors hard over the next 20-30 years. Conservatively assuming inflation of 4% per year, that $50,000 income requirement will have increased to $90,000 in 15 years!

How Much is Enough? How big a nest egg do you need to provide $90,000 annual income? In the 1990’s, everyone assumed that earning 10% per year return on your money was a no-brainer. After experiencing the recent bear market and record low interest rates, however, that 10% number seems like just a sweet dream.

Considering a more realistic expectation of 6% return on your conservative leaning nvestments , and the need to provide $90,000 income for 30 years of retirement, your required nest egg would be $1,238,834. Scary number? Sure, but don’t forget your assets and savings will grow as well – if you set them aside today!

Role of Home Equity. It is fair to assume that some of your nest egg will come from home equity. Home equity alone may not solve all your retirement needs, however. 1) Many new retirees have already borrowed a majority of their home equity for college and living expenses. 2) Hopes that real estate prices will continue growing at a double digit clip for the next 10 years are completely unrealistic. Many experts believe prices are due for a fall or an extended period of stagnation. 3) Housing expenses continue in retirement: If you sell your house, you still need to pay for a place to live! The truth is that it is unwise to expect home equity alone to provide the level of income necessary to support the retirement lifestyle you desire.

Working in Retirement. Many boomers expect to continue working in retirement. A prudent retirement plan needs to consider that this may not be possible. Very few people of retirement age continue earning the same salaries they earned when they were in their 40’s and 50’s. Those who continue to work usually opt for part time jobs, or working in their own businesses where they can control their own hours. The very real possibilities of forced early retirement or health problems making it impossible to work at all implies that we should not count on earnings from continuing employment for anything other than a supplemental income source.

Start Planning Today! If you have 10 or more years until retirement, it is not too late to act. By cutting expenses and making a serious commitment to retirement planning and investing, you can still save enough to allow for a comfortable retirement. Retaining the services of a competent, trustworthy financial planner can help. The experience, knowledge, and insight gained by going through the planning process over and over again is worth every penny you will pay in planning fees.

If you are rapidly approaching retirement, and you have not saved enough, there are still options available. Homeowners over age 62 may consider reverse mortgages to tap their home equity without leaving their home. A smaller home in a less expensive locale can often help make ends meet by cashing out equity, reducing taxes, utilities, and maintenance costs. Of course, expense control in retirement will be critical. Working part time is an option. Perhaps you also need to take a little more risk than you would like with your investments to generate additional return. Again, it is wise to consult with a professional advisor such as Frontier to review all the possibilities.

Note: 6% return is consensus likely long term potential based on current expectations for diversified equity/income investments. Such investment returns are not guaranteed. Actual returns on any given investment portfolio could be greater or less than this amount, and can be impacted by numerous external factors.

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