Don’t get hung up on a savings number
The internet abounds with retirement calculators that will help estimate the size of the nest egg you’ll need so you don’t outlive your money.
Although having a retirement savings number is important, it’s also a moving target and fixating on one number runs the risk that you won’t adjust your savings goals to new circumstances, such as higher health care costs, inflation or the vagaries of the economy. Life isn’t stationary and your retirement plan, including any target savings number, shouldn’t be either.
Instead of focusing exclusively on the size of your nest egg, create a comprehensive retirement plan that you’ll refine over time. It should include your financial goals, a net worth statement, a working budget, debt management strategy, emergency funds and any insurance.
Any retirement plan also should reflect your expected retirement lifestyle, investing horizon, risk tolerance, savings goals and estate planning. You’ll want to consider how your retirement savings would hold up under different scenarios — simulating extreme market conditions or unexpected life events — to be sure your bases are covered.
A financial professional can help you do it or use Microsoft’s free online Retirement Financial Planner template. Revisit the plan every few years while you’re accumulating assets and whenever you have a life change, such as switching jobs, losing a family member or moving.
As retirement nears, the plan should factor in your required minimum distributions to minimize your tax burden. You want an appropriate mix of taxable and nontaxable investments, such as a Roth IRA combined with a taxable brokerage account, as well as a balance of stocks, bonds, real estate and other assets.
Many retirement spending models use the 4% rule in which retirees withdraw 4% from their retirement portfolio in the first year of retirement. Each year thereafter, they adjust the dollar amount of their withdrawals by the previous year’s rate of inflation. The rule is designed to prevent retirees from running out of money during a 30-year retirement.
Your current spending also may be nothing like your retirement expenses because when we have more leisure, we often spend more. “The bigger question you should ask is ‘What type of life am I aiming for?’ ” says Chris Browning, host of the Popcorn Finance podcast. “Do you want to live a simpler life and move somewhere cheaper and slower paced than where you’re living? Do you want the ability to give money to family and friends?”
That clear vision — backed up with a written budget — can guide you in setting and adjusting savings targets as well as motivate you to build wealth. In retirement, health care costs escalate dramatically. Working households spend about 6% of their annual budget on health expenses, versus 14% for retirees, according to the Kaiser Family Foundation.
“You need to allow for flexibility because your life is going to change over time,” Browning says.