Everything You Need to Know to Prepare for Retirement

How much money is enough to retire?

I work with a lot of clients who are planning for retirement. Some are early in their careers and want to put best practices into place ASAP. Some are nearing, say, the 40 year mark, just starting to see retirement as a reality on the horizon, and want to make up for lost time. Others are on the brink of retirement and want a second set of eyes to help them feel confident that they’re going to be ok once they pull the trigger. Some have not saved for retirement and want to better understand what the future holds.

Regardless of where you are, it’s probably time to start thinking about retirement savings. If you start saving early you can let time do the heavy lifting for you and scrimp and save less to meet your goals. If you are starting late you can budget accordingly and take steps to bridge any gaps between what will come in and what will go out. 

Wherever you are on the spectrum, now is the best time to prepare.

This is one of the reasons why I find retirement-centered media so frustrating. It too often decontextualizes very complicated questions with titles like “30 things every 30 year old should know” or “Here is the exact amount of money you should have saved at every age.” 

I call BS.

How much you need to retire is less about the year you were born or a multiple of your salary and more about your expenses. The most important question is this: How much money do you need each month to live comfortably? 

What the experts say

One of the most influential studies on the topic of retirement was the Trinity Study, which intended to determine how much one would need to save to cover their expenses and what a safe rate of withdrawal is to make that money last. To make a long story short, to live on just your savings with no additional income, the study says you’ll need to save about 25 times your average annual expenses to live comfortably through retirement (which these guys estimated would be about 30 years). This assumes that you withdraw from the fund at a rate of 4% per year. For example, to cover $40,000 in annual expenses for 30 years, you’d need to have about $1,000,000 saved.

This becomes more complicated when you consider the other factors, like social security, pensions, or other income that many of us will count on during retirement. For instance, if you need $40,000 per year to live and expect to bring in $2,000 per month in social security, you only need to have about $400,000 saved to cover your needs.

How long will it take to save?

How long it takes to save for retirement and how much you need to save is a factor of how much time you have before retirement. If you have your money invested relatively aggressively, you can expect it to double every 10 years, even without adding to it! This is the power of compounding. The earlier you start, the more time has the power to help build your wealth. The later you start, the more work you need to do to get those numbers. According to this article from Vanguard, if a 25-year-old saved $10,000 per year until the age of 40 and stopped investing entirely, they’d still have more money at retirement than someone who started saving at 35 and invested for retirement for 30 years.

The takeaway is that you should save and invest early and often, and if you haven’t started you should start now.

What you can do to prepare

To get a handle on how much you’ll need to have saved for retirement, first you need to know how much it costs you to live today and how your expenses might change. I suggest that you track your expenses, every day, to see what a week of your life costs. From that, you can get an idea of your monthly and yearly expenses and have a goal in mind.

From there figure out what other sources of income will be there to help you make ends meet. If you have a pension, an annuity, or a social security estimate, these will help you to see how much your savings will have to cover.

Then take a look at retirement calendars like these that can help you make a plan. As educators and coaches, we know that goals are more likely to be achieved when they are specific, measurable, achievable, relevant, and time-bound. If your goal is nebulous, say “I’d like to be ok for retirement one day,” it’s going to be hard to accomplish. If you’ve done your homework, however, you can determine how much you need to save each year between now and when you’d like to retire, and you can take the steps you need to take to make that happen.

The next step is action. Many experts and advocates have argued that the best way to prepare Americans for retirement is to automate their enrollment into their 401k or other retirement plans. Short of a major policy shift, the next best thing is to automate your retirement savings on your own. The goal is to make paying yourself first non-negotiable and to treat those contributions as just another bill. And if you have old 401ks kicking around, use a service like Capitalize to help wrangle those accounts and get those investments working for you.

Where should you go from here?

Wherever you fall in your retirement prep, we believe everyone should have access to financial planning. A Financial Trainer is here to help, join our Trainer on Demand program or One-on-One memberships! You can also check out our B.F.F. approved budgeting tools.

Everything You Need to Know to Prepare for Retirement is written by The Financial Gym Team for

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