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DURING THE PANDEMIC, I started devoting more time to retirement planning. But I had more questions than answers. I called a friend who was a financial planner.
“Retirement planning is confusing,” I told him. “I have a lot of questions.”
He laughed and said, “The answer is money. What’s the question?”
While his answer was humorous, it reflected what most retirees already know: Money is crucial for a good retirement. While it isn’t the only thing you need for a happy retirement, it certainly helps.
How much money do you need? There are many variables, including an individual’s cost of living, retirement aspirations and health, so general guidelines can be risky.
Still, we know retirement can be expensive even if you don’t travel extensively. Health care expenses continue to rise. Even general inflation often puts a squeeze on retirees’ budgets. One rule of thumb says you need 80% of your pre-retirement income to maintain your standard of living once you stop working.
What does that mean in terms of savings? Americans spend roughly 20 years in retirement, on average, but some people will live far longer. Experts say, at retirement age, folks should have savings equal to 10 to 12 times their annual income. For instance, if your annual income is $80,000, you might target $800,000 to $960,000 in retirement savings. If you have other sources of retirement income, such as a pension, you can likely make do with less savings.
Most folks don’t come close to hitting such savings targets. According to the Federal Reserve, households headed by someone age 65 to 74 had average retirement account balances of $609,000 and median, or typical, savings of $200,000.
Ideally, you should start saving for retirement early in your career, socking away perhaps 10% to 15% of your income. To get a sense for whether you’re on track for a comfortable retirement, try playing around with HumbleDollar’s Two-Minute Checkup.
If you’ve spent many decades saving diligently, allowing yourself to enjoy those savings once retired can be a struggle. A BlackRock study found that most retirees still had at least 80% of their nest egg remaining after two decades in retirement. Uncomfortable spending your nest egg on yourself? Instead, you might use the money to make gifts to family members or to charity.
Now that my wife and I are retired, I’m hoping Social Security and my pension will be enough to cover our regular living expenses. To make this happen, we worked longer, delayed taking Social Security, downsized and cut back on other expenses. We’ll end up dipping into savings to pay for unexpected costs. But we hope such expenses will be few and far between, so our savings will keep growing, at least during our early retirement years.
To quote George Bailey as he’s talking to Clarence the angel. Clarence says, “We don’t use money in Heaven.” George says, “well it comes in pretty handy around here, Bub.”
We can get all metaphysical about retirement and delve into purpose and meaning, but none of this matters until one has solved the money problem first.
Recently I was consulting with my daughter on her finances. Since she divorced years ago I have spent a fair amount of time helping her get her finances in order. I managed to get her disparate retirement accounts into one Vanguard account.
Just this year she has been able to max out her 401K, Roth IRA, and HSA.
I was recently meeting with my fee only financial advisor regarding the logistics of starting Roth IRA conversions for my wife and I, and mentioned that I felt that I had brought my daughter as far as I could with my investing knowledge. I felt that I did not have the knowledge of California tax law to help her limit this tax liability, nor the knowledge on how to expand into taxable investing. I felt like a California based fee only based CFP was in order.
His response pleased me as he felt my daughter and I had done all the necessary heavy lifting. He stated that at her age (38) she was well set up and the cost of a financial advisor was not necessary.
Oh yeah, and she has no debt!
Good Dad! I did something similar when my daughter divorced after 10 years. Matter of fact, I encouraged her to delay her divorce for 4 months, to past over the 10 year period, for “social security benefits from prior spouse” purposes.