3 Simple Steps To Having Enough Money To Retire

It's no secret that you should be saving money for retirement over and above what Social Security, your pension or 401(k) plan will cover. But do you know how much money you need to retire so that you can maintain your chosen lifestyle? Most people don't and the consequences can be catastrophic.

According to the Retirement Confidence Survey published by the Employee Benefit Research Institute, only about 42% of the work force has actually calculated how much money they will need for retirement. The Institute's research also shows this one simple action greatly increases the odds that you will succeed in achieving your retirement savings goals.

If you would like to put the odds in your favor then follow these three simple action steps to assure that you can afford to retire…

Calculate Your Retirement Needs

Calculating how much you will need is the first step in planning for a secure retirement. You can use one of the many free online retirement calculators to help you figure out how much you will need over and above Social Security and/or your pension, IRA or 401(k) plan.

In order to use the retirement calculator you will need to prepare basic estimates for your retirement spending budget, expected Social Security and Pension benefits, and your current savings balances. Once you have pulled that information together it is relatively easy to plug the numbers into a calculator and determine what your retirement savings should be.

The key point when completing this exercise is to not worry about perfection. It is more important to create an estimate somewhere in the ballpark than to get hung up on details that might cause you to fail in completing the task. You can always perfect it later. Just get it done and get started in the right direction.

If you are like most people, you probably have only a vague idea right now of what it will take for you to enjoy a comfortable retirement. By calculating your number you remove the vagary and define a starting point that allows you to take concrete action steps toward achieving your goal.

Set Your Savings Goal

Now that you know how much you will need for retirement the next step is to subtract your current savings to establish a retirement savings goal. For example, if you need $750,000 and you already have $350,000 in savings and 401(k) balances then your new savings goal becomes the difference between the two numbers – or $400,000.

Taking this example one step further you can create an annual savings goal by dividing the total above by the number of years remaining until retirement. For example, assuming you have 20 years until retirement then using the above example you would need to save roughly $20,000 per year (400,000 divided by 20 years). Similarly, you can then divide the $20,000 per year into 12 months to determine a monthly savings rate of $1,667.

Just to clarify, the calculations above could either include inflation and investment growth or exclude them. In other words, there are two ways to crunch the numbers to determine your monthly savings goal and both are acceptable.

• The complicated route is to include return on investment capital thus reducing the savings requirement, but then adjust spending and savings for inflation thus raising the savings requirement back up. What you will find is the two factors largely offset each other causing complication to the calculations without necessarily increasing accuracy.
• The simple route is to keep everything in nominal dollars by ignoring return on investment while also ignoring the inflationary effects on spending and savings requirements.

While the simple approach is not as precise as the more complicated version, the reality is your estimate will only be as accurate as your assumptions about inflation and return on investment anyway. Since neither can be accurately estimated for 20 years into the future it is sufficient to use either approach just to make sure you are in the ballpark and heading in the right direction.

In other words, the most important objective is to just get started because procrastination is far more damaging than any lack of accuracy in your estimates. You want to establish a goal and work toward it with a minimum of complication and obstacles to forward movement. That is more important than getting mired down in complication that might confuse you.

My suggestion is to keep it simple for now and fine tune your calculations later once you have established forward movement. Improved accuracy is a good thing, but getting started today is far more important. Once you have clearly established a retirement savings goal and a regular pattern of contributing toward the goal then it makes sense to increase the precision of your numbers.

Develop A Plan To Meet Your Savings Goal

After you have determined how much you will need to set aside each month to meet your retirement goal, you may find it difficult to save enough to achieve it. There are many alte ative ways to make ends meet…

• If your company offers a 401(k) plan or an IRA, you can increase your monthly contribution.
• Another alte ative is to continue working beyond the usual retirement age in order to build up your retirement savings and/or pension benefits.
• You can develop a second income.
• Similarly, you can downsize your work to a consultant in your present field after retirement, or find part time work in another area to supplement your income and offset insufficient savings.

You might be pleasantly surprised to find that your employer is happy to accommodate your needs and help you succeed in reaching your retirement goals. Any way you look at, all the above actions will serve to close the gap between what the retirement calculator shows you should have saved and what your retirement accounts actually show sitting in savings.

In Summary…

In summary, the first step in successful retirement planning is to calculate how much money you need to retire. According to the Employee Benefit Research Institute nearly half the people who took this action then continued to take additional actions such as increasing contributions and varying investment strategies.

In other words, when you raise your consciousness around the money needed to retire you will likely also take steps two (set a savings goal) and three (develop a plan to reach your savings goal) in this three step process. You will change your actions to become congruent with your new goal and increase the likelihood you will make the goal a reality. It works like cause and effect.

The message is simple enough – estimate your retirement savings needs now and don't get hung up on the details. Just get in the ballpark and get into action. Your financial security depends on it.