The question of “how much money do I need to save for retirement?” is one of the most common for American workers, and one of the trickier questions to answer. The answer, of course, is “it depends.” But how can you begin to form an estimate?
There are plenty of online calculators out there, and using one of these can at least provide a ballpark estimate to help you establish investment strategies and savings targets. However, beyond plugging some numbers into an algorithm, a good estimation factors in some important elements: proper attention to a long-term plan, realistic expectations, and an understanding of exactly how you’ll tap into those savings when the time is right. A financial advisor can put all these factors into perspective and work them into a sound strategy; however, I’ll focus here on some best practices and important questions to ask, hopefully getting you started.
The Link between Worker Confidence, Preparation, and Use of an Advisor
Before you begin the process of calculating exactly what you need, know that your efforts to formulate a plan in the first place are already setting you in the right direction. Also, just being given an easy opportunity to save can make a big difference. Each year, the Employee Benefit Research Institute (EBRI) releases the Retirement Confidence Survey, a report on the state of retirement preparation among workers and retirees in America. This year’s report finds that “workers who have a retirement plan have saved more than those without a plan, have taken more steps to prepare for retirement, and feel less stressed about retirement preparations.” 
Americans also agree strongly on the value of working with a financial advisor. Nine in 10 workers in that same survey feel it’s important to work with an advisor with expertise in retirement planning issues: covering medical and long-term care expenses, claiming Social Security benefits, developing a financial plan for retirement, and converting assets into retirement income. It’s hard to get 90% of Americans to agree on a lot of things, so to me this underscores the complexity of the planning process, and that Americans know it takes time and attention.
Be Realistic about the Expenses You Include in Your Calculations
You may have heard the term “garbage in, garbage out” before, and it certainly applies when calculating your retirement costs. Any estimate of such a large amount of money, needed potentially decades in the future, should include a wide variety of factors to be reliable. If the expenses you estimate in retirement are not realistic and thorough, chances are you will end up facing costs at some point that you hadn’t planned for.
Studies show that financial shocks in retirement are common; a recent focus group by the Society of Actuaries showed that 78% of retirees reported having experienced at least one unanticipated financial shock. The most common mentioned in the survey included housing repairs and maintenance, giving/lending children money, health care, marital changes after retirement, investment losses, inflation and taxes. Because there does not seem to be any substitute for the first-hand experience of living your day-to-day retirement, be sure to factor at least some unanticipated expenses into the ultimate number you establish.
How Will You Use Your Retirement Funds?
While most retirement budgets will include obvious factors, such as housing, transportation, clothing, and health care, the rest is largely determined by your desired retirement lifestyle. Many of the costs associated with pre-retirement life may disappear by the time you are ready to make withdrawals. For example, your kids will (hopefully) already be self-sustaining adults and your mortgage will likely be paid in full, or close to it. On the other hand, some day-to-day costs you currently incur may increase; nearly half of your lifetime healthcare expenditures are likely to happen during your senior years.
Also give thought to whether or not you want to create a legacy through your savings. Do you want to save just enough money to get you through retirement, or do you hope that your money will leave a financial legacy after death, either for beneficiaries or as a charitable donation? These questions can uncover a meaningful part of retirement for many people, so give thought here as you would to any other part of your budget.
A Withdrawal Plan and “The 4 Percent Rule”
Regardless of the end goal, retirement planning is not just about saving the dollars, it’s also about accessing the dollars later. The more types of retirement vehicles you are able to save your dollars in, the more flexibility you can create for yourself in retirement. Think beyond your workplace retirement plan and look into additional savings vehicles such as a Roth IRA and health savings accounts. And while Social Security is a welcomed, guaranteed income during retirement, it is wise not to rely solely on it for your retirement needs. With more Americans living longer lives, the Social Security safety net will likely be stretched in the coming decades.
As you think more about withdrawing from accounts, the 4% rule is a great rule of thumb for establishing exactly how much of your nest egg you should plan to use at any given time. The 4% rule suggests that annual withdrawals from your investment accounts should be no more than 4% of the value. For example, if you have saved $1,000,000 for retirement, you can safely withdraw 4% from that account per year.
Take Proactive Steps to Achieve the Retirement You Desire
Hopefully the considerations mentioned here have opened your eyes to the many needs you will have in retirement, and you are ready to increase your saving efforts. Review your budget to see if there is room to redirect funds towards savings. If you haven’t already, work towards maximizing contributions to your 401(k) plan. Interestingly, the Millennial generation already has an earlier median beginning age for retirement savings, which will pay them huge dividends as their savings compound each year.
If you’re already funding the 401(k) to the max, consider other retirement vehicles with your financial advisor. They will explain the many reasons and scenarios in which a post-tax savings account, such as a Roth IRA, can function as an emergency savings account whose extra funds become a wonderful source of tax-efficient retirement income.
Given that retirement is meant to be the happy twilight years of our lives, it’s no wonder that we are concerned with the cost implications of those years. Avoid stress beforehand by consulting a financial advisor – they are well-equipped in the art of retirement planning and can customize a contribution strategy that will help you meet all of your retirement goals.