You may be better prepared than you think. Find out where you stand.
If you search “retirement readiness” on your favorite search engine you will come across a great many articles that tell of the lack of preparedness of current and future generations and that everyone is drastically underinformed on what they need to do to find security in their retirement plans. But is that really true? Are people really as unprepared as the headlines suggest?
Research sharply defies what is being reported by the news and financial institutions trying to scare people into making the wrong decisions with their money out of urgency. In a study done by the benefits consulting firm, Towers Watson, it was found that, among other things, reporting does not account for people’s ability to save more after their kids are grown and may overestimate the amount that people will need for retirement.[i]
Part of the disconnect is due to the fact that the reporting is based on broad assumptions in order to lump a large number of people into one statistic. The reality, and I see it daily in my practice, is that statistics rarely tell the story of an individual. Money is so personal, and everybody’s financial story is so unique that if you look at retirement planning on a granular level, people are in pretty decent shape as long as they have a good plan in place as to how to make their retirement income work for them and work for them for a long period of time.
So, before you get pushed into making financial decisions from someone who is warning you that you are massively unprepared for the next phase of your life, take a closer look at your own finances and expectations and don’t pigeonhole yourself into being a statistic.
Check Your Saving Strategy
It is recommended to save between 10% and 15% of your annual income (this can include your employer match) in a retirement account. If you are young and have recently begun your career path, get in the habit of doing it now. If you are farther along in your career and have not been so diligent, well, there is no time like the present to start good habits and, there may be some opportunity to save more than just the 10% – 15% to get you caught up to where you need to be.
As is always the case, life gets in the way of our best-laid plans and having to choose between saving for college and saving for retirement can be difficult. You don’t need to trade one for the other. If you need to, split your savings between the two (70% college/30% retirement) for a few years and you shouldn’t be slowed down too much in the long run. After all, children grow up, houses get paid off and people get paid more as they advance in their careers. If you’ve reached your mid-fifties, expenses start to feel a little lighter and income feels a little heavier. By this time, you may be able to make up for some lost time by saving 20% or 25% of your annual income. You can also benefit from the catch-up contribution allowance for those 50 and above for your IRA and 401(k) accounts.
Define Your Goals
For some people, it is advisable to replace 100% of their pre-retirement income for their retirement. But if you are relatively healthy, your home is paid off, you have no plans to travel around the world or snorkel in Bali and you want to keep a part-time job or start a small business, then you may be just fine with having enough savings and retirement income to satisfy just a 75% or 80% replacement of income. According to a survey by T. Rowe Price, the majority of respondents were living on 66% of their pre-retirement income and most reported that they were living as well as or better than when they were working.[ii]
So, the takeaway is, in order to determine what you should have for your retirement depends largely on what your personal goals are for your retirement. Identifying what you want, need and value will help you and your advisor determine what number is right for you.
Do the Numbers
Understanding how you will spend your time in retirement is important and so is understanding where your money will be spent. Living your life realistically without denying yourself enjoyment is important, so before you start, get a decent picture of what that will look like. Obvious expenses like housing, utilities, fuel, food, clothing, and entertainment are a good start but don’t forget about including trips you might like to take, large purchases you may want to make or little things you might forget about like pet expenses, housekeeping, or lawn care.
This exercise can help you adjust your plan to make the numbers work. You may find that you have a cushion you didn’t realize you’d have or you may find that you will need to do some tightening. If you aren’t in a prime position to have the money you’ll need in retirement you may choose to work a few more years, stay on in a part-time capacity or reduce your spending projections to fit your budget.
You Aren’t a Statistic
I am a big fan of the old adage, “Where there is a will, there is a way.” Most of the time we are able to help our clients find solutions to fund their goals. We start by approaching every situation as unique because it is. So, before you throw in the towel and commit yourself to believing that the reports on people’s failure to plan accordingly are true, take a moment to give yourself a pat on the back for what you have done and then be proactive about filling in the gaps. As always, we here at Andersen Wealth Management, are here to help.