We came across an article titled “Under 40? Don’t Worry About Retirement,” which after reading was not quite as provocative as the title may have indicated. The article reinforced our belief that you need to focus on your savings, because so many life changes can happen before retirement. There may be unexpected children, employment changes or illnesses that may change your plans or views about retirement.
We are often amused by the articles that state “You need $2 million to retire today.” These articles do not take into account the many variables including how much you earn, how much you spend, where you live and when you plan to retire. We have seen many clients over the years with millions of dollars who never retire. Likewise, we have clients with $250,000 in investable assets retire early and comfortably.
For example, one of our first clients was a doctor that made more than $1 million a year. He and his wife spent $600,000 a year. He came to us with $5 million invested and wanted to retire. Unfortunately, we had to tell him at his current spending level, his $5 million would last him four and a half years.
This is where the planning is key. If you don’t plan, you should be able to save 10% of your income and probably be OK. However, retirement is different for everyone. Some people are fortunate to love what they do and have a desire to work until their late 70s, while others want to retire as soon as possible. As your desires change, so should your savings habits. If you want to retire as soon as possible, perhaps you should save 40% to 50% of your income.
At 65, a retiree can expect to live to 84, about 19 years in retirement. Your assets have to last you that long. Even if you have earned the maximum during your working years and retire at 65, the most you can get from Social Security is $2,431 per month. That is only $29,172 per year. You have to save outside of Social Security.
The earlier you begin saving, the better off you should be, and the less you’ll have to save over your lifetime. At 22, if you save $5,000 to an IRA for five years and earn a 10% return, at 65 you could have $1,613,006. However, if you begin saving at 45, contributing $5,000 for five years, and $6,000 once you reach age 50, you’d have to continue to save $6,000 a year until age 65 while earning a 10% return to have $355,962.
This is why we stress to young investors how important it is to begin contributing to your 401(k) at work. Begin with enough to get the full employer match, as this is free money your employer is giving you. As you get raises, you are adding more to your retirement account as the contribution is a percentage of your pay. If the money is never in your take-home pay, you will never miss it.
At Henssler Financial we believe you should Live Ready, and that includes understanding how your savings habits will affect your retirement. If you have questions regarding your savings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at email@example.com.