Seven essential financial questions: No. 6

It’s easy to put off answering this question. In our twenties, retirement seems so distant that saving for it is not a priority. In our thirties, we are caught up with our careers and family such that retirement planning gets overlooked. It’s usually not until our forties that we begin to realize that we will want to retire one day, which leads us to wonder if we will have enough money when the time actually arrives.

Obviously, retirement is one of the most important reasons for saving money. Most of us don’t want to work forever, and retirement could be forced on us by poor health, the economy, or changes in our family situation or field of work. Think of retirement savings as putting away enough money to provide the financial freedom to make choices in your later years. If your savings are sufficient, then you get to choose to continue to work or choose to do something different with your time. The key is making it your choice.

Learning to live within a budget, building your emergency fund, and beginning to get out of debt are fundamental steps that you need to be working on to make retirement savings possible. However, you do not want to wait until you are out of debt before you start saving for retirement. This is especially true if you have matching contributions coming from your employer into a 401(k) or other retirement plan. I recommend that you start by saving at least 5% of your take-home pay toward retirement. As soon as you get rid of your debt, other than your main mortgage, increase your retirement savings to a minimum of 10%. Many baby boomers are finding that their savings rate needs to be much higher because they put off getting started.

It is impossible to give you a simple formula for how much money you need to retire comfortably. Use a retirement planning calculator or one of the many online tools available. Better yet, seek the help of a financial planner to go through this with you. You will need the following information:
• Desired age to retire
• Current retirement savings
• Expected Social Security
• Expected pension income
• Amount of retirement income needed

The most difficult part is figuring out how much income you will need in retirement. A good place to start is by taking the total of your current spending and subtracting anything that you don’t expect to spend in retirement (for example, having your mortgage paid off ). Use the information you developed for yourself in the budget section of the workbook.

Most planning calculators ask you to make assumptions about investment returns and inflation. You should be conservative in your investment return assumptions, especially if you are within ten years of retirement. A financial planner can give you guidelines specific to your age and risk tolerance.

By working through this calculation process you will have a good idea of the amount you need to save to meet your retirement goals. If the amount is more than you can afford to put away, continue to make adjustments in the calculator until you develop a plan that works for you. This can be a very eye opening experience. Thinking through your specific retirement goals now and learning what is required to reach those goals is challenging but also very rewarding.

The money you put away in your early working years will have a huge impact on your retirement savings. As you get older the required savings amount will become a much larger percentage of your income if you did not save enough when younger. Too many individuals I meet today failed to save enough in their twenties and thirties. But no matter what your age, now is the time to get your plan on track. And I emphasize this is one planning area where getting the assistance of a financial planner can be of great
benefit.