When It Comes To Planning Your Retirement, This Is Rule Number 1
Written by Kyle Mayers
July 02, 2018 |
If you don't know your retirement number, you might never achieve it.
As G.I. Joe might say, knowing is half the battle. Too many Americans assume they will never save enough money for retirement, and that somehow things will magically work out. In reality, 44% of Americans 65 years or older have some level of debt, and debt is not something you want to deal with during your golden years. Knowing the amount of savings you need to retire comfortably is something you should have figured out long before you are nearing retirement age. By calculating how much you will need, you will expose certain realities that may influence financial decisions that you might not otherwise scrutinize.
Knowledge is Power
If you know, you can choose. You can choose to investigate options when it comes to spending, rather than accept the offer being presented to you. This concept is particularly important when it comes to financial decisions that seem to be minor. Subscription providers, like TV or mobile phone services try to entice you with offers that seem to be very inexpensive. But their charges are monthly, and that obscures what you pay on an annual basis. Did you know that a $65.00 per month mobile phone plan is the same as a $780.00 per year mobile phone plan? Would you sign up for a plan if it cost $780.00? The reason mobile plans are stated in monthly terms is to hide their true cost from you. But if you are 20 years old and sign up for a mobile phone plan that is $20.00 per month more expensive than you need, you are sacrificing $47,956.81 in savings that you could have had at age 65. By knowing information like that, and how it affects your retirement gives you the power to choose.
While we're on the topic of TV and mobile phone service providers, knowing your retirement number helps you identify bad actors in the marketplace. Any merchant who uses obfuscation techniques to make expensive goods seem cheap needs to be carefully scrutinized. Never trust anyone who claims things like easy payments or offers up a free bonus. When it comes to monthly subscriptions, nothing is ever free. You are going to pay for that free bonus either within your monthly payments, or as part of the increase in monthly payment charge you will eventually pay.
Bad marketplace actors are all over the place, so it is not just restricted to TV and mobile phone service providers. Watch for these bad actors in the car industry as well as banking. In the world of insurance, watch for fear tactics preying on your lack of knowledge of both risks you face as well as your knowledge of insurance coverage. Lack of insurance coverage knowledge might lead you to be double or even triple covered for a risk. Since only one payout can ever occur, double or triple coverage is a waste of money.
Knowing challenges your definition of facts. Assuming you'll be fine in retirement is very different from knowing it. Too many Americans assume that somehow things will magically work out for them financially by the time they retire. Your retirement number can be calculated, and simply by looking at your savings through your bank's online tools or mobile app you can know in a split second if things actually will work out or not. If you know this information while you are young enough to make changes, the impact will be minimal when you are at your retirement age.
You Number Will Motivate
Knowing that money saved is time saved, specifically in terms of how much less time you must spend working, you will tend to use extra money for savings, rather than splurging. Earlier we noted that by choosing a mobile phone plan that is $20.00 per month less expensive than your current plan will mean you have an additional $47,956.81 in retirement savings by the time you are 65. Put in terms of time, that might be the same as retiring a year sooner.
Understanding your number and its relationship to your retirement date in terms of time might make you choose to work harder. When it comes to working, it may be that you can half ass it for 40 years or full ass it for 20. By applying yourself at work, chasing a higher level at every opportunity, you may make your path to retirement a lot easier.
But this tactic comes with a warning, and it was nicely summed up by The Notorious B.I.G. in his song, Mo Money Mo Problems. Just because you enjoy success at work does not mean you should deviate from your retirement plan. Far too often a promotion at work means a promotion to a new luxury car. If you can resist the temptation to spend the new earnings you will receive from job advances and put that money instead to your retirement, you will greatly accelerate your retirement date. However, if you grow accustomed to luxury goods and spend more than you received from your job promotion, not only will you fail to bring your retirement date forward, you might end up as one of the 41% of Americans you have debt when they hit 65 years old.
If you know your number, you will tend to encourage others to determine theirs. This has a reinforcing effect, as peer pressure can destroy your ability to save for retirement. Friends often encourage you to come with them to the game or theater and while that can be a blast once in a while, it can be a financial burden if it happens all the time. Friends also encourage expensive behaviors like going out to restaurant and clubs. If you can accommodate a lifestyle with a high spending focus on entertainment, that's fine.
But having those costs without considering their impact on retirement is foolish. When you know your number, and discover that an $80.00 night out ten times a year will add up to $159,856.02 from age 20 to your retirement age of 65, then odds are good you will think twice about whether you really want to go out. Spending $80.00 on a night out ought to be a special night, not Tuesday night. When you know your number and the impact spending has on it, you will be better able to make that distinction.
Calculating Your Number
Calculating your number for retirement will depend on a few factors. For example, the percentage of your take home pay you can set aside for retirement will play a significant role in determining when you can retire. According to Mr. Money Mustache, if you can save 75% of your take home pay, you can retire in 7 years. So for example, if you earn the average wage of all American workers at $925.98 per week and you take home 75% of that amount after taxes, you will have saved $235,281.45 after 7 years if 75% of your take home pay goes to retirement savings. That also assume you will earn 5.4% per year on all your saved money, which is actually quite conservative. The more challenging part is that in order to live this way, you need to be able to survive on $9,028.31 per year for all aspects of your spending. For the average American, I'm not optimistic that's realistic.
A more realistic savings amount would be 25% of your take home pay. At that rate, and with the same assumptions on earnings, you would have enough to retire after 30 years to continue living on $27,084.92 perpetually. The total amount saved would be $677,414.26, and without saving any further amount, you could continue to safely withdraw 4% of that savings each year and actually have your savings balance grow due to the fact that your 5.4% earnings is greater than your 4% withdrawal.
Missing from this type of planning, however, is the forecast of major events. Granted, no one has a crystal ball to see into the future. But if you are driving a 5 year old car today, you can be fairly certain that you will have a major expense to pay in replacing the vehicle in about 5 years down the road. Saving more now in anticipation of that expense is the ideal way to attempt to avoid impacting your retirement savings when you inevitably require a new car.
Many retirees believe that when the time comes to retirement, any shortfall in their retirement saving will be made up through living on less. Can you live in retirement on less than your take home pay today? What would enable you to live on less? If it is actually possible for you to live on less in retirement, why not make those changes today? The point is, instead of imagining you can live on less, live on less. You don't need to do it forever, but how about a week? If you can't last a week living on less, you certainly can't survive in retirement when you have no other option to earn an income.
Summary
If you don't know your number, you won't know if you're going to miss it. Planning is the key when it comes to retirement, and it does not take much to get off track. Sometimes emergencies or even expected large purchases can derail your retirement, but by planning ahead, you can help ensure that you return to form. Knowing your number will help clarify where your money is going and force you to ask some tough questions before you spend. Calculating your number can be a motivating experience and can lead to important life changes including how you approach work. Finally, knowing your number will mean you don't retire with any surprises based on false assumptions that things will all work out in the end.
Do you have a retirement plan? If not, will you change and think about creating one? If you do have a retirement plan, what are some of the life changes you made as a result of that planning?