Baby boomers have reached or are approaching traditional retirement age within the next 15 years, but many are unsure whether they can afford to retire or, even worse, think they have enough saved but really are not sure it is an adequate amount. They may have a 401(k) through work or have an IRA. However, they have not really evaluated their costs and adequacy of their savings. Making sure there is enough saved to retire can be eye-opening, but it can also save a lot of heartache later.
People who talk about retiring soon need to ascertain whether they have met their retirement savings goals and evaluate what they need to do to retire financially stable. Here are five steps people can use in gauging or making sure there is enough saved to fund their retirement plans before they retire:
- Calculate Current Monthly Expenses. Monthly expenses are very telling about habits now and what the needs may be in the future. For example, some estimates say someone who needs $50,000 a year to cover their bills now will need more than $120,000 in 30 years.
- List Goals Post-Retirement that Will Impact Spending Levels. Post-retirement goals can add considerably to savings needs. So, list out future plans, such as travel, weddings or college still to fund, healthcare costs, new cars every XX years, home improvements, etc. and when those expenses would likely be incurred. The monthly expenses estimate needs to include enough cushion to fund these as they occur. Likewise, if the mortgage or credit cards will be paid off, or child is finishing college, calculate how much less money will be needed in the future.
- Look at Current Savings Accumulated and Expected Social Security. Is there retirement savings or a pension? Will there be an expected inheritance coming? Adding up the savings is the depressing part for many, since many adults have not really saved enough for retirement. Additionally, many homes no longer have equity that can be converted into an additional source of cash. It is also important to know realistically what Social Security benefits will be received in the future. (In 2011, the average couple received about $23,000 a year.) Facing up to how much money there is or can be expected is an important reality check.
- Now, Using the Information Gathered So Far, Calculate What the Savings and Expenses Will Be at Retirement. Use the “Rule of 72” to calculate how much savings and expenses will grow between now and then. Here is how it works: Take 72 and divide it by the interest rate being earned or expected to determine have many years it will take for the amount to double. For example, it will take nine years to double your savings if you earn 8 percent interest (72÷8=9 years). If inflation is 5 percent, costs double every 14.4 years (72÷5=14.4 years).
- Figure What Can Be Spent Annually to Cover Those Expenses. See if there is enough to cover future expenses. Plan to use about 5 percent of the savings annually in addition to Social Security. Using more than 5 percent could result in outliving the savings if they are not replenished with annual earnings. The old concept of investing conservatively at retirement is not as true now when bank CDs and money market accounts do not beat inflation and people live 20-30 years beyond their retirement date. So, make sure the money is invested in vehicles that protect it but allow for growth so post retirement the money earned each year can replace the money used and be sure to last.
It is impossible to truly know how mush is needed to retire comfortably, particularly when it is impossible to know how many years one will live. However, taking a sensible approach to making sure there is enough saved before setting a date to retire can help avoid shortfalls in one’s later years.
By Dyanne Weiss