Doesn’t it just seem like yesterday that you started your first job? And now you are looking retirement in the face. Time does fly, doesn’t it? In our twenties, retirement seems a lifetime away. We were focused on getting that first paycheck and experiencing life. Saving for retirement is not even on the radar, and then life happens: your career takes off, you get married, buy a house, have children, and so on. Oh, if we only listened to our parents early on about saving and investing.
While it is never too late to make some impact on our retirement nest egg, we need to understand how the rules of our financial freedom in our later years have changed. For many the market impact to our 401k was hit hard in 2008-2009. Many had to dip into savings, pension or 401ks if their employment was affected and are still catching up. Many parents and even grandparents are supporting their kids and grandkids. Life, indeed, has changed.
So what now? In the wake of a different financial world, there are new principles for managing and budgeting for your golden years:
1) 15 is the new 10. Today, with longer life expectancies and interrupted careers, workers should save 15 percent of their gross income, inclusive of their 401k (employer match), based on their projected lifestyle currently and in retirement. Per T. Rowe Price senior financial planner, Stuart Ritter, if you have not saved anything, the higher above 15 percent that you can go, you should.
2) Goal for retirement savings should be 10-12 times your final salary. For most people, and including your Social Security, this should be a sufficient amount to generate pre- retirement income.
3) Preretirement Gross Income. Do you know yours? It should be 70-80 percent of your annual income. Think about what you live on now and what you won’t need in retirement. For instance, if you are in sales and travel, all of those related expenses such as gas, lunch or dinner entertaining clients, will potentially go away. However, if in retirement you plan to travel more and help your kids or parents, you will need to stock away more. Need help figuring it out? The Ballpark Estimate online calculator can help determine a projected target. Log on at choosetosave.org/ballpark.
4) Emergency Savings. Life happens at any age, but in retirement with set savings, it can have maximum impact. Thus, start putting back three to six months’ worth of living expenses that you can access quickly in times of unforeseen circumstances. You can help that little fund grow by potentially investing in a balanced mutual fund or another short term growth fund.
5) Stock Market and your age. While the stock market can be up and down, it still provides the biggest and most consistent growth opportunities for your dollars. The old rule of thumb was to pull back on stock investment the closer you got to retirement and subtract your age from 100. Today, investment experts are advising people in their 50’s to subtract your age from 120 as people are living longer, plus have a continued investment in stocks as stock growth options can continue to grow and supplement your funds. We implemented this strategy for my mother and my aunt. It has become invaluable in funding assisted living, memory care and living expenses.