Planning for retirement can be scary. A good retirement plan starts early, when retirement still feels like something very far away. Pacing yourself towards such a long-term goal can be difficult, especially with all the life hurdles you will likely encounter. But with planning and self-reflection, you could be well on your way spending your golden years in financial security.
How much will you need?
Think about what you will need in retirement. Where will you live? How much will you spend on utilities or food? Will you eat out often? Will you be making payments on a car or a mortgage? A lot of this information will be easy to figure out, based on your current living expenses. However, some of the guessing will have to get a little more creative. During retirement you will have more time to travel, but taking advantage of that opportunity could be expensive. On the other hand, you might decide to move to a cheaper home, or simplify your life in some other way that might decrease your expenses. Lastly, you need to leave a wide margin of error to allow for any expensive medical bills, or other unexpected costs, that might come your way during your golden years. With these considerations in mind, calculate what you will need per year.
Here’s a general picture:
Fidelity created a basic model for anyone who wants a general idea of how much they need to save. The end goal is eight times your projected yearly expenses. To build up to that, Fidelity suggests saving one year’s cost by the time you are thirty-five, three times that amount by forty-five, five times that amount by fifty-five, and eight times that amount by sixty-seven, their projected age of retirement.
The Fidelity model is far from perfect. As you would expect for a general, one-size-fits-all retirement plan, it assumes a lot. Firstly, it assumes that you are getting social security. Secondly, it assumes that your income has been growing steadily by 1.5% every year. Thirdly, it assumes that you encounter no periods of unemployment or life emergencies that take money away from your retirement savings. It’s improbable that all three of these factors will happen in actuality. Additionally, it’s not a bad idea to aim for a larger retirement fund, maybe ten times your projected yearly costs instead of eight. Still, it’s not a bad place to start.
Personalize your retirement plan
For a better picture of how much you need to save and when, check an online retirement calculator. These calculators allow you to enter information such as your income, your spouse’s income, your retirement goal, and the amount that you’ve saved already. Try multiple calculators, as they all determine plans slightly differently. If possible, talking to a personal financial advisor will get you an even better picture of what you need to do, as well as investment options and other information.