Guarantee Yourself Enough Savings to Retire
After 30 to 40 years of saving for retirement, can you guarantee your 70-year old self that you’ll have saved enough to retire?
I’ve talked before on my personal blog “The Wall Street Geek” about the controversial history of today’s primary retirement savings vehicles–namely, the 401K plan. Over the course of 30 years, it has grown from being an executive perk into the primary retirement savings vehicle for post-Baby Boomer generations.
At issue is the fact that retirement income from a 401K–as well as other self-directed plans such as an IRA–is not guaranteed. Unlike a pension which is a defined benefit plan, your retirement income from your 401K is 100% a factor of your decisions and actions the previous 30 to 40 years. And if you’re among the 27% of working adults who are “not at all confident” about their level of savings according to a study by a nonprofit research organization, you may have just gulped thinking about your life after 70.
So what’s a person to do besides becoming a startup billionaire and guaranteeing yourself multigenerational wealth?
Begin With the End in Mind
One of the first questions I ask new clients is when would they like to retire, and where? A client who wants to retire in 20 years in Manhattan will require a different level and rate of savings than one who wants to retire in 40 years in Florida.
Why? A common strategy is that when you’re ready to fully or semi retire, you may reposition your savings into investments that will grow enough to prevent inflation from devaluing your savings over time while providing you with income.
The ideal income situation is usually in the form of interest income since that attempts to avoid spending down your principal. It’s synonymous to growing a tree and living off the fruit instead of eating the tree. That way, your tree will still exist to provide you with more fruit in the future.
Retirement Portfolio Rules of Thumb
A general rule of thumb is that if you reposition your savings into common retirement vehicles including inflation-protected bonds, large value dividend-paying stocks or annuities (which are often referred to as personal pensions); with the correct choices you could receive 3-5% of interest income from your savings each year for a significant portion if not the rest of your life.
Therefore generally, if you saved $500K by age 70 and want to retire, you may be able to generate up to $25K per year in interest from your savings to live on in retirement.
Using a crude calculation, this could imply that you need to save over $16K/year for 30 years in basic savings. Or if you’re unable to hit your basic savings target, investing may help whatever you’re able to save grow at a higher rate of return and make up the difference.
Once again, this is a general and crude calculation and is not meant to be used to determine your retirement strategy. Investing also involves risk of loss and fluctuations in account value.
With this in mind, think about where and when you’d like to retire and calculate backwards to determine what actions you need to take today. An advisor can help you with this, as well as help you plan for unexpected financially-intensive events such as at-home medical care.
Creating the next FourSquare and retiring wealthy can still be a goal, but having a backup plan in case that doesn’t happen is a smart strategy.
While today’s retirement savings vehicles won’t guarantee you retirement income, by thinking ahead and proactively managing your plans for retirement you may provide your future self with the right level of fruit to live on comfortably.