Have you started saving for retirement but are wondering if you’re saving enough each month? Perhaps you haven’t started saving for retirement and are ready today, but don’t know how much to put aside. Maybe you’re putting aside what you can for retirement but have a nagging feeling other things will derail your retirement savings.
This blog post is about how much to save for retirement and how to avoid derailing your retirement planning.
MPower Co appreciates Dr. Thia’s stance to “save as much as possible and find peace that you’ve done all that you can do.” While it can be as simple as that, perhaps a few more guidelines and additional information can help encourage you to save money each month for retirement and help you avoid some of the pitfalls along the way.
Historical Rules of Thumb In Personal Financial Planning on How Much Money to Save for Retirement
In Personal Finance there are benchmarks that are taught through the years. Saving for retirement has one such rule of thumb. MPower Co warns, though, that this rule of thumb should not be taken as the end-all-be-all. MPower Co considers this a minimum. Perhaps it is a good starting point, but customization and consideration for unique variables should be given.
So, what is the rule of thumb? Personal financial planning says to save a percentage of every dollar you earn for retirement. Saving for retirement starts the day an individual has earned income. Most financial planning studies suggest that the ideal contribution percentage to save for retirement is 15% of gross income.
The recommendation used to be 10% but has recently been bumped up to 15%. Why? Because traditional pension plans are becoming extinct and employers are quickly opting out of subsidizing health care insurance for retirees, as well. With more and more of the risk and costs of having adequate income and health insurance in retirement being shifted to workers, the need for setting aside money for retirement has increased.
Dr. Thia states, “I’ll admit it is hard to get the attention of earners in their 20s and 30s to save for retirement. The benefits, though, are huge. Their money has decades to grow in anticipation of retirement. The best day to start saving for retirement is the first day you have earned income, the second best day is today.”
What if You Don’t think You Can Set Aside 15% of Earned Income For Retirement?
What if setting aside 15% is impossible, given a person’s other financial demands? Set aside something. Starting with 8% or 10% is something. Then you can use one or both of the following techniques to bump up retirement savings over time:
- Annual Increases: On January 1 of each year bump up your retirement savings 1% or 2%. Within a few years you will be close to or exceeding 15% of retirement savings.
- Increase Savings As Income Increases: If you are in a career path that has incremental increases (i.e. raises, bonuses, cost of living adjustments, etc.) in pay, increase your retirement savings as pay increases. Since you’re already used to living on the prior salary, diverting the increase in income to retirement doesn’t negatively impact current living.
Where to Save For Retirement
Contributions could be made into a 401(k) plan, 401(k) match received from an employer, IRA, Roth IRA, and/or taxable accounts. Get determined to leave any money saved for retirement in place for retirement. Too many people compromise their financial security in retirement by dipping into their retirement funds for a down payment on a home, to fund a move associated with a job change or, even worse, for a vacation.
In fact in a recent presentation Dr. Thia gave recently, one attendee asked, “I have funds saved for retirement but was planning to access the funds to pay for my child’s college education. We don’t have any other options to fund college. Do you agree it’s a good idea to pay for college over keeping the funds for retirement?” Read on to hear about her answer!
12 Ways to Ensure Your Retirement and Retirement Savings Aren’t Derailed
Because the onus on providing financially for retirement is leaning heavily towards the individual and away from employers, individual choices make a big difference on how much money individuals will have.
Emphasizing the need to make informed choices and supersizing how much is saved for retirement, here are 12 ways that retirement and retirement savings can get derailed:
- Raise Dependents to be Financially Independent. Make the “Bank of Mom and Dad” or “Guardian Bank” your dependent’s last financial resort, and emphasize your bank is not the first place they have to come calling when they are running short of money. We raise dependents socially, spiritually, and physically. Raise them financially, too. You know the value of having an emergency fund, of setting personal and financial goals and saving for them and to resist impulsive debt. Help them learn these critical lessons, too, even if it means they have to learn important lessons the hard way.
- Prioritize Your Retirement. If you have to choose between money for your kid’s college education, their wedding, their car, etc. or setting aside money for retirement, it is a no-brainer. Your retirement comes first. This may seem harsh, but in fact, it is quite loving. Providing for your retirement first before providing these other things for your children is a benefit for your children as well. See, the money you set aside for retirement minimizes the chance that your children will need to change their lifestyle to provide for your care, housing, food, etc. While college costs are substantial, there are sources of scholarships, grants and loans for college students. There are no other sources that will be willing to loan you money long-term for your living expenses in retirement.
- Conserve Purchasing Power. Our grandparent’s generation was able to live in retirement on interest money from laddered Certificates of Deposit and interest from government bonds. That was decades ago. Today Certificates of Deposit and interest from government bonds provide a real risk in the way of spending power. If you have millions (enough to provide for all of your needs and most wants), and conserving your wealth is your only priority, these instruments may be ok. However, for the vast majority of people, in reality, these instruments are inappropriate because they provide significant purchasing power risk. The interest on insured accounts is lower than the rate of inflation, which means your money will buy less a year from now than it will today. That’s money-wasting its time.
- Carefully Invest. Not everyone is comfortable investing. Behavioral economics says we are far more likely to remember when investment markets go down than when they go up the same amount or more. Investors that are willing to take reasonable risks and that have five years or more for their money to grow need to invest. Uncomfortable? In Dr. Thia’s course Richer Retirement and Lea’s, MPower Co’s Founder and CEO, course MPowered Couple, there is a section about finding an advisor and ensuring that you avoid suspicious sales tactics.
- Don’t Chase the Market. Investing is not the same as rolling the dice for excitement in Los Vegas. Our markets historically return 8%. If you are chasing 15% returns because you are close to retirement and a recession hits, a world of hurt and more working years may be in your future. Find appropriately risked investments and stay in the boat. There have been a number of studies saying that attempting to time the market does not yield better results.
- Plan to Live a Long Life. Dr. Thia finds that many people are pessimistic about how many years they will live in retirement. It is not unrealistic to think that you may live 1/3 of your life in retirement. Life expectancy for men and women is into their 80s. Plan on needing income for 30 years or more in retirement. After all, who wants to be average and just live until their 80s? The possibility of outliving your resources is very real and one of the main fears of many.
- Don’t Rely Solely on Social Security. This does not mean that Social Security is bankrupt. There is a reality that Social Security will be around for a long time to come. However, some people think the opposite of Social Security being extinct by the time they retire and instead believe they can live solely on Social Security in retirement. Social Security is designed to only replace 20-40% of our pre-retirement income for most. Are you ready for an income cut of 60-80%? We at MPower Co aren’t! You’ll need multiple sources of income in retirement.
- Don’t Rely on Establishing New Income Sources After Retirement. While it may be positive to work part-time in retirement, you can’t be sure your health will permit working or that the marketplace will have a job that is a match for your knowledge, skills and abilities. Retirees are having a particularly hard time locating jobs during the pandemic when there are also many dislocated workers looking for work. So, if you know you want to work part-time in retirement, don’t plan to work part-time your full retirement and have the part-time employment in place before retiring.
- Age Proof Your Home. Evaluate your home to see if it can meet your needs in retirement. Sorry to be blunt but your health won’t improve as you age. It will likely deteriorate. Can you live on the main level of the home, if needed? Look at your current living space and think about whether you could manage if a walker or wheelchair were needed. Is your home full of tripping and falling opportunities? The best fall is a fall avoided.
- Understand How You Will Be Taxed In Retirement. Don’t think that income taxes automatically stop when you retire. This may surprise some, but up to 85% of your Social Security benefits may be taxable, depending on your other income. If you have saved tax deferred money (like traditional IRAs), when you withdraw the money it will be taxed as income. Don’t plan on spending 100% of your retirement income. Uncle Sam will come calling in retirement, too.
- Emergency Funds Are Needed In Retirement, too. Life happens and not always in a good way. One of my clients explained it well. “It wasn’t easy to get an emergency fund in place, but now that I have one it is life-changing. What used to be financial emergencies are now just financially annoying.”
- Learn to Say No. Be able to say “no” to other people and organizations that have ideas of what you can do for them, and usually at your expense, when you retire. You likely have a goal of helping others, but choose when and how you want to give. Don’t let them choose for you. Get so busy with your purpose and meaning in retirement that you don’t let others set your agenda for you. You determine what you are retiring to.
Want to Learn More about Richer Retirement
Being ready to retire is so much more than having the proper amount of funds in a retirement account. This is why Dr. Thia authors and instructs our online course Richer Retirement. Learn more about Richer Retirement and Dr. Thia to determine if Richer Retirement can help you. Follow us on Facebook and Instagram to get additional insights.