Saving for Retirement: How to Make your Golden Years Golden
Nobody wants to work past 70, or even 65 if they can help it. In fact, it you asked most people, they’d choose to retire much younger if the funds were there. The big question is always the same, how much do I need for retirement? The answer is pretty much the same as well. How much you need for retirement depends on the lifestyle you wish to live after you stop working. As with any retirement plan, it’s important to save as much as you can now, and plan early so you can see what you will need to do to reach your retirement goals.
How much do I Need?
To answer that question you will need to decide what standard of living you want to enjoy when you stop working. Maybe you are making $70,000 a year now and you like the lifestyle it affords. Does that mean I will need to have saved $70,000 for every year I expect to live after retiring?
The sad fact is, that because of loss of purchasing power due to inflation, what $70,000 buys today will not be even close to what it will buy twenty years from now when you retire. Every year you lose out to inflation. Some people still remember when they could buy a Snickers Bar for a nickel. What made it go up to a buck fifty? Inflation made it go up.
The average yearly inflation since it has been tracked by the Federal Reserve is 3.23% a year. That means that every year you can purchase 3.23% less than you could the previous year. To make it easier lets round up inflation to 10% and imagine today that you have $1,000 to spend.
Because of that new 10% inflation, next year your money will buy not $1,000 of goods and services, but it will only get you $900 of goods and services. That is because over the space of a year you lost 10% or $100 due to inflation.
To really see how much of an impact inflation has on your money you have to use a time value calculation and factor it out over the space of twenty years, or however long you have before you are going to retire.
The Calculation
Suppose that you make $70,000 a year right now, you enjoy the lifestyle that it affords, and you would like to maintain that same lifestyle during your retirement years. Just how much money would you need to have each year just to maintain the same standard of living, and how much will you need in order to last for a 25 year life expectancy after retirement?
Using the historical average for inflation, 3.23%, if you are going to retire in 20 years, the value of your $70,000 in 25 years will be about $31,619.00, a far cry from your $70,000. That is what inflation does to your money. That means that to have the same purchasing power as $70,000, in 25 years you will actually need about $154,969.00.
If you expect to live for another 25 years after you retire, that means you will need to multiply that $154,969.00 by 25 years. Your new grand total, the amount of money you need to have squirreled away for your retirement is a whopping $3,874,225.00. If there were no inflation you would just need $1,750,000.00, or $70,000 multiplied by 25 years.
How to Get There from Here
Now the big question is, “how do I get from my current position of wealth to the amount I need for retirement. First of all congratulate yourself. By virtue of reading this, that means you are already planning for your retirement. Now you need to figure out how much money and investments you have, and what the shortfall is if any.
In other words, if you added up everything you have today and it comes to $150,000, it means you need about $3,724,225.00 more dollars in order to have your retirement fully funded. The new question is, how do you get from $150,000 to nearly 4 million dollars? For most American workers the answer will come in the form of some type of retirement account like a 401(k) or a SEP-IRA.
If you are fortunate enough to have a job that offers you a retirement account like a 401(k) where your employer matches your contributions; that is how you will get to your retirement goals. The best thing you can do is to contribute as much money as allowed by the IRS to the different retirement account that you have. Make a calculation based on how much you contribute annually, how much your employer matches, factor in growth from investments and see what numbers you come up with over the following 25 years until you retire.
If that figure is $3,874,225 then you know you will meet your retirement goal. Anything less than that figure means you have a shortfall and will have to figure out how you can make up for it. Maybe you will have to invest more aggressively for a few years, or just figure out how to save a little more money.
Probably the best thing you can do for yourself and your retirement is to meet with a financial planner to come up with a practical strategy to make sure you meet your retirement goals. You’ll be glad you did.
Knowing where you Stand
If you don’t know where you stand in terms of saving for retirement, chances are, you’ll never meet your retirement goals, short of winning the lottery. Once you know where you stand, you will be able to make a plan that works for you.
Armed with that plan you can go to work knowing you are doing everything in your power to make sure your golden years really are golden.
Loxley McKenzie has been active in the sales of overseas property for over than years before starting his own company Colordarcy.
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Category: Retirement
