Retirement planning: three things to consider
Dec 13, 2023
Headlines about retirement can be confusing, especially when it comes to millennial spending habits. In 2022, CNN told us millennials are saving more for retirement than baby boomers did at the same age. But just three months later, CNBC claimed millennials and Gen Z aren't saving enough for retirement.
So which is it? The answer is: both.
Millennials and Gen Z tend to start saving for retirement in their 20s, giving them more runway for their savings to compound and grow over time.
Most boomers, however, didn’t start saving for retirement until their 30s, meaning they had less time to save.
As a result, young people today tend to have higher overall balances in their retirement accounts compared to the previous generation.
But still, with the way retirement planning is changing, today’s working generations may not have enough money saved to feel confident in having a comfortable retirement. Things are relatively more expensive now - like homes and kids' education - making it harder to save at the same rate.
Plus, unless Congress fixes the funding issues for Social Security, retirees are estimated to only get 76% (vs 100%) of their full benefits starting in 2037. Things are getting more expensive, quickly.
Retirement may feel far enough away to not matter much now, but actually starting early can make the process significantly easier. Here at Plenty, we can help you plan for retirement the easy way. We believe it’s possible to balance enjoying your life now, while also ensuring you can still enjoy life in retirement.
Three important questions to answer for retirement planning
At a high level, there are three main questions to answer when planning for your retirement.
When do you want to retire?
How much should you save?
What do you want to do?
Let’s dive into each one.
1) When do you want to retire?
When the Social Security program was first established in 1935, the full retirement age was 65. This is why people have used 65 as a target age for retirement for so long. Along the way, eligibility changes were made so the current full retirement age for Social Security is now age 67.
But the future of the Social Security program is uncertain. As such, age 67 isn't necessarily relevant for your retirement planning goals.
Your actual retirement age will likely fall somewhere between when you'd like to retire and when you can afford to retire. It can also be a moving target as you make your way through your career, consider your goals, and determine what's possible.
In a world where the average lifespace is getting closer to 100, more people are also thinking about staying professionally active for longer. Studies have shown that delaying retirement by one year can even decrease your mortality rate by 11%. The reasoning behind this is that work keeps your mind and body active, which can help maintain your physical and cognitive abilities.
So what does retirement age actually look like in the US? Based on a LIMRA Secure Retirement Institute analysis, roughly 51% of Americans retire between the ages of 61-61 followed by 13% of Americans retiring between ages 55-60.
2) How much should you save for retirement?
There’s no right or wrong way to decide how much money you should save for retirement. Here are some common ways to figure out how much you need.
Method 1: 25X your annual expenses
Carefully calculate how much your household spends each year. You can come up with a frugal budget, regular budget, and champagne budget. Now multiply your annual expense by 25X to come up with your retirement savings goal.
Frugal budget: $35,000 X 25 = $875,000 = retirement savings goal
Regular budget: $80,000 X 25 = $2,000,000 - retirement savings goal
Champagne budget: $150,000 X 25 = $3,750,000 retirement savings goal
So where did the 25X multiple come from? It comes from the inverse of the “4% Rule,” which was created in the mid-1990s by William P. Bengen, a retired financial adviser who first articulated the 4% withdrawal rate.
Based on Bengen’s early research of actual stock returns and retirement scenarios over the past 75 years, Bengen found that retirees who draw down no more than 4.2 percent of their portfolio in the initial year, and adjust that amount every subsequent year for inflation, stand a great chance that their money will outlive them (Source: Wikipedia, 2023).
In other words, if you have a $1 million retirement nest egg at age 65 and withdraw ~4%, or $40,000 a year, for the rest of your life, you will unlikely run out of money. Multiplying $40,000 a year by 25 times gets you to $1 million.
Method 2: 10X your salary by age 67
Another way to figure out a rough estimate of how much to set aside for retirement is to save 10 times your salary by the time you turn 67 (Fidelity, 2023). You can achieve this by saving an increasing multiple of your salary every 7-10 years.
For example, start out by saving 1x your salary by age 30. Then aim to have 3x your salary saved by age 40, 6x by 50, 8x by 60, and 10x by 67.
The reality is, if you can save 10X your salary at an earlier age, then even better!
Here’s a super simple calculation to help you visualize what that could look like. Let’s say you make $100,000 a year and your salary doesn’t change over time. With this logic, you’d want to save $100,000 by age 30, $300,000 by age 40, all the way up to $1,000,000 by age 67.
In reality, however, your salary is going to change over time (hopefully it will steadily increase) and there’s also inflation to consider. So, if your $100,000 salary rises to $250,000 by the time you’re 67, your 10X savings goal by age 67 would be $2.5 million ($250,000 x 10).
Method 3: The detailed calculator method
Another way to decide how much to save for your retirement is to play around with a retirement calculator. Input your current savings, how much you're willing to contribute, and what age you might retire. You can change the inputs around until you find a number you're comfortable with.
Here’s an example of how different inputs for current savings and recurring contributions can result in two divergent outcomes.
Static inputs: current age = 35, income = $150,000
Plan A: current savings = $38,400 (the average 401k balance for someone in their 30s), contribution to savings = 8% of income until age 65. Results: You’d be at risk of running out of savings by age 71
Plan B: current savings = $150,000 (1X salary), contribution to savings = 15% of income until age 65. Results: You should have enough money to last until age 81
Method 4: The 70% method
The final way to determine how much you need to save for retirement is to take your current salary and assume you'll want to live on about 70% of that salary, adjusted for inflation, by the time you retire.
That means if your salary is $100,000 today, you’d plan to live on $70,000 a year in retirement. If you plan to retire at 65 and live until 90, you'd want to save a total of $1,750,000 using the 4% Rule mentioned above ($70,000 divided by 4%).
All of these retirement saving targets may sound high, but remember that compound interest will see your balance grow exponentially as you approach retirement. And your income is likely to steadily grow until then, as well.
What do you want to do with your time?
One of the most fun questions to answer in retirement planning is what you want to do with all of your free time. Do you want to travel? Garden? Explore the world's best restaurants? Spend time with family?
Even if you have an ideal vision of what you want your retirement to look like, it’s OK if it winds up changing. The key is staying consistent with saving and investing, and updating your retirement savings target as your life and dreams change.
Thinking about FIRE (Financial Independence Retire Early)? Don’t worry, we’ll be talking about that soon in an upcoming article.
How can Plenty help with your retirement goals?
Plenty allows you to connect all your retirement-designated accounts to our platform and view them in one place. This includes your personal savings, 401k, IRA, brokerage accounts, and more.
We'll show you how they grow, and set goals to track your progress. We can also forecast how much you might be able to save over time, and ask questions to give you an estimated target to show whether you're on track or not. And if you’re not, we’re there with expert advice to get you back on track.
Retirement planning may seem overwhelming, but a little goes a long way. Especially over a long time. See what you can do to increase the amount you contribute to your 401k, save what you can in an additional investment account, and let compound interest do the rest.
- Team Plenty
This information is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.
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