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Retirement Savings Guide


By The Human Interest Team

Editorial Policy

A quick Google search yields 88,500,000 responses to the question, “How much do you need to save for retirement?” You’d already be retired before actually reading all of the related articles. So how is the average reader able to figure out whether you’ll need $1,000,000 or $100,000 saved up for retirement? The National Retirement Risk Index (NRRI) found that half of those working today are “at risk” of not continuing their current standard of living in retirement. This retirement guide will examine the retirement research and help you map out a strategy to discover how much you’ll need to retire and how to attain that goal. Read: Who Should You Trust With Your Retirement?>>> Step one is to answer several questions that will give color to your quest. After understanding your projected future retirement path you’ll learn how to reach your retirement goal.

Define Your Retirement: Lifestyle and Location

A study by Munnell, Webb, and Hou at the Center for Retirement Research at Boston College makes the assumption that you’ll want to replace your current cost of living in retirement. Actually, this may or may not be true. If you are considering moving, you may choose a lower cost of living area, or higher. Certain expenses of your working life are eliminated in retirement, while others, such as medical costs, increase as you age. Finally, there’s the biggest unknown: how long you will live in retirement. Here’s where you to need to create an approximate template for retirement spending as well as how long that money must last. Before tackling the dreaded retirement budget, spend some time envisioning your retirement. Will you add in travel? Are you expecting to relocate? Are you committed to leaving an inheritance to your children? To get a handle on how much you need to save for retirement, put a dollar amount on your retirement dreams. As unpleasant as this task may be, it’s useful to create a tentative retirement budget. The easiest way to approach this task is to look at your current expense categories. If you use Mint, Quicken or other software it is easy. If not, then a pencil and paper approximation will work. Vanguard has a simple retirement planning budget that includes categories for many typical income and spending choices. A retirement projection wouldn’t be complete without attention to your income. The next section integrates Social Security estimates into your retirement planning.

Your Retirement Number Is……?

An easy way to estimate your retirement number is to trust expert researchers. In the previously mentioned Center for Retirement Research at Boston College, “How Much Should People Save?” the researchers estimated that income replacement rate will depend upon your household income level before retirement. For individuals in the low income third of workers, 73% of pre-retirement income should be enough of a replacement rate. Middle income workers will need a 71% replacement rate of their pre-retirement income and high income earners need a lower 67% of their income replaced. Fortunately for the lower income earners, Social Security should cover a greater portion of their income in retirement than for those higher earning workers. Before panicking, visit the Social Security portal for helpful information about your estimated retirement benefit. There are 11 calculators to augment your retirement planning. Once you have an estimate of the dollar amount of the monthly benefit, you can begin to tackle how to make up the difference. Here’s where a retirement calculator can put a number on your retirement dreams. There are many online retirement calculators from which to choose. We gave the CalcXML tool a try. OnTrajectory has a retirement calculator and financial planner in one. As with any tool, the outputs depend upon your inputs, in other words, this is an approximation of how much you might need for retirement, not a definitive answer. Employers: Here’s why you need to start a retirement plan>>> Here’s an example of someone (let’s call her Jillian) navigates their retirement planning: Jillian is 36 years old and earns $85,000. She currently has $45,000 saved up for retirement and looks forward to retiring at age 66. Jillian is hoping to replace 80% of her current income in retirement. She uses the CalcXML calculator to help her determine what percent of her current salary she’ll need to save in order to create a secure retirement. The results from her calculations show that at present, she needs to save approximately 13% of her existing salary. If that seems extraordinary, recognize that the 13% includes the matching contribution amount her employer kicks in to her workplace retirement account. So, if her employer matches 4% of her 401(k) contribution, them Jillian only needs to pony up 9% (13% – 4% employer contribution) of her salary for retirement savings. These calculations assume a pre-retirement return on her investments of 7% and a post-retirement return of 5%.

How to Save and Invest to Reach Your Retirement Number

If your retirement goal seems insurmountable, remember retirement is not one day in time. It is a period of life which may last for decades. Don’t let a big retirement number goal cause you to panic and avoid saving for retirement. Options for reaching your retirement goal:

  1. Invest as much as you can in your workplace 401(k), 403(b) and/or IRA.

  2. Don’t let fear of volatility keep you from keeping a healthy portion of your retirement savings in faster growing stock funds.

  3. Increase the amount you put into savings each year, you won’t miss this money.

  4. Factor in working part-time during retirement to smooth out your income needs.

  5. Slash the biggest spending holes; housing and vehicle expenses. Look for ways to cut back your living expenses with a less expensive vehicle and smaller home. Transfer the savings into your retirement fund.

Your projected retirement target is an estimate in time. As you age and approach retirement, your number will change. Your investments may grow faster than anticipated. Your salary may increase more (or less) than expected. You may want to follow your grown children to affordable Memphis, Tennessee or Fayetteville, Arkansas — two of the cheapest places to live in America. Revisit your retirement plan regularly and continue to save in your 401(k). Don’t let the market ups and downs keep you from moving forward with your retirement saving and investing. Employees: Convince your employer to set up a 401(k) retirement plan at your workplace>>> Photo credit: Pixabay

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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