How would you like a simple retirement planning strategy that’s doable — and could boost your retirement nest egg by $800,000?
For an optimal benefit of that size, you need many years before retirement.
If you have only a few years, you still benefit. Just not quite as much.
The only real question is how big the boost to your nest egg will be. It could be even more than $800,000. That depends on your exact circumstances, such as age, pay and investment earnings.
Retirement Planning: Adults Who’ve Saved Zero
Start with the crux of the problem. More than one-fifth of U.S. adults have less than $5,000 to show for their retirement planning. And 15% of American adults have zero in their nest egg, according to a new survey by Northwestern Mutual.
A mere 16% of U.S. adults have $200,000 or more in retirement savings.
An Actual Written Plan
So what can you do about it if you’re one of those people who is not saving enough — if anything? The first remedial step in your retirement planning must be, well, to make a plan.
“Many people have a loose game plan in mind, but not something that is written and tied to actual income and cash flow,” said Emily Holbrook, director of planning for Northwestern Mutual.
Retirement Planning: What’s Your Dollar Goal?
And a key element in any such retirement planning is to figure out how much you need to save. In turn, that depends on calculating how much annual income you’ll need in retirement.
Holbrook’s advice is to figure out those two key dollar figures by crunching as many numbers that go into the mix as possible.
That means making a written budget and putting in essential spending figures for everything from food and clothing to housing. “It means figuring out how you intend to spend your retirement,” Holbrook said. “Do you plan to travel, support your kids and grandkids?”
And your retirement planning must build in a cushion to help you handle setbacks. “Have you thought about the risks of market volatility, health care, longevity?” Holbrook said.
Hate Crunching Numbers?
But what if you hate crunching numbers? What if that’s simply not how you like to spend evenings or weekends?
There are shortcuts. Try online calculators. EdwardJones.com’s calculator is a simple tool for calculating how much you’ll end up with if you save various amounts annually.
The Vanguard Group calculator will let you do the same thing, plus include projected income from Social Security and a traditional pension.
Retirement Planning: Are You On Track?
But what if you want to know whether you are on track to amass the amount that experts believe you need? IBD has an easy-to-use table. It shows you how large your savings need to be as a multiple of your income.
It’s a simple grid that applies to workers who are anywhere from age 35 to 65, with annual income of $50,000 to $300,000, based on calculations from J.P. Morgan Asset Management.
For example, it shows that if you’re earning $75,000, by age 40 you need 2.4 times your income, or $180,000, in retirement savings. Simple as that.
Figuring out where you stand at any given age, with any given amount of income, is only half of the battle. The other half is closing the gap if your savings are not big enough. Good retirement planning provides solutions.
How Much To Save
Financial advisors are virtually unanimous in recommending that you save 10% to 15% of your annual income. But a lot of people find it hard to trim their take-home pay by boosting contributions to their 401(k) or similar company-sponsored retirement account.
If you’re saving, let’s say just 3%, then jumping up to 10% — let alone 15%, even with a company match — may seem as unrealistic as a “Guardians of the Galaxy” movie plot.
But here’s how you can make that task a lot easier.
Win With Small Steps
Instead of mushrooming your contribution rate to 10% from 3% in one giant leap, why not increase your annual contribution rate by one percentage point a year? “I think there is a psychological component to taking small steps, seeing progress, and celebrating it that can be beneficial,” Holbrook said.
In other words, small steps can make it easier to get the job done.
Look at the numbers. Suppose you are 25 years old, earning $50,000 and saving 3% of your pay. Let’s say your pay raises average 1% a year. Imagine that your annual rate of return averages 7%.
That’s actually a conservative retirement planning assumption. Large cap stocks averaged an annual rate of return higher than 10% from 1926 through May 31 of this year, according to Morningstar Inc. Small caps averaged about 12%.
And let’s say you aim to retire at age 70. At the end of those 45 years, your nest egg would have grown to $400,338, according to the BankRate.com retirement planner calculator.
$1.2 Million Nest Egg
Look how much better you’d do by boosting your savings contributions by one percentage point a year until you’re socking away 10% of your pay. By age 70, your nest egg would be more than $1.2 million in size.
That would be an increase of nearly $858,000. Not bad for a strategy based on small incremental annual steps.
The closer you are to retirement, the less time that your savings will have to grow through compounding. Let’s say you’re seven years from retirement. The one-percentage-point annual savings hikes will boost your nest egg by $32,816 in that time. That’s more than double the $13,341 you’d end up with by anteing up just 3% in that period.
So time enables your nest egg to compound more. “Starting early puts time on your side,” Holbrook said.
But even someone close to retirement can see a real difference in a short span of years.
Source: Investor’s Business Daily
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