Making a retirement plan
We all have to retire sometime. Yet, an estimated 6 in 10 Americans have no idea how much money they’ll need to retire comfortably. Less than half of Americans say they’ve got sufficient resources or tools to save for retirement, and just 16% of Americans are confident they’ll have enough saved to live on during their golden years.
To make plans for retirement, start by figuring out how much retirement income you’ll need. You can estimate spending during retirement, determine how much you’ll receive in Social Security, and calculate how much income your investments need to produce to cover the gap between spending and benefits.
Divide the shortfall by your expected investment returns during retirement to find out how much savings you’d need to cover costs without touching your principal balance. If you think you’ll earn 5% in retirement and want income of $60,000, you’d need $1.2 million. Use a calculator to determine if you’re saving enough to hit your goal or if you need to increase your savings.
While you’ll probably draw down your principal over time – and that’s fine, because you can’t take it with you – this conservative method will ensure that you have more than you need. If you have high healthcare expenditures, or if your investments don’t perform as well as planned, you’ll have spare cash.
You can also use a retirement savings calculator to estimate how much you’ll need during retirement. However, be careful about the assumptions the calculator makes regarding how much income you’ll need, as most calculators estimate you’ll spend less than you did before retirement, and this isn’t necessarily the case.
Once you know what you need to save, make automated transfers of funds each payday to a 401(k) or IRA to hit your goals.