Nine Keys to a Great Retirement

Retirement is supposed to be the period of life when you can do what you want to instead of what you have to. But while most Americans are looking forward to retirement, many are not planning for it. Here are nine simple keys to realizing a great retirement:

• Calculate your retirement number. Find out how much you need to save. The old rule-of-thumb says that middle-income households usually need to replace 70% to 75% of their current living expenses in retirement to maintain their pre-retirement standard of living. But the one big wildcard is growing health care costs. As such, a better rule-of-thumb is to estimate how much you’ll need to withdraw from savings during your first year of retirement (adjusted for inflation) and multiply that amount by 25 to determine your target number. For example, if you want to withdraw $40,000 from savings your first year of retirement, you’ll need to have saved $1 million. (For an example, see how I set my retirement number.)

• Develop a plan. Once you know your number, you need a specific plan to reach it. Most families may save for retirement, but without a plan their saving is random and haphazard. Having a plan means determining how much to save each month to fund retirement, putting that amount into your budget, and, if necessary, taking steps to fund the needed amount by cutting back on expenses or earning extra income.

• Begin immediately. The earlier you start, the more time your money has to grow. Financial planner David John Marotta has noted, “Every six years you delay adequately funding your retirement cuts in half your retirement standard of living. The wisest financial decision you can make is to start – now!” and I agree. Save now, invest now, and let your money work hard for you -- compounding throughout the years.

• Start with your 401k.Your 401k is the best place to save for retirement if your company matches your contribution. Be sure to put in the full amount for the match.  It’s free money and a tremendous return on your investment even before you start working to make it grow.  In addition to building your nest egg, your contribution will also reduce your taxable income this year.

• Contribute savings above the 401k match to a Roth IRA. If you get the entire 401k employer match and still have retirement money left to save, contribute to a Roth IRA if you’re eligible, as your money will grow tax deferred and tax free.

• Max out the 401k. If you still have money to set aside for retirement after fully funding the Roth IRA, max out on your 401k. No, you won’t get a match on it, but it will grow tax deferred as well as lower your taxable income this year.

• Invest wisely for growth. To make the most of your retirement savings, you need to invest for growth, which means investing in stocks. Your best investment option is probably a stock market index fund (such as one tracking the S&P 500 or the “total market”), which usually outperforms most other mutual funds. This strategy has four big advantages: it’s cheap, it’s easy, it’s unlikely to significantly decline and, even though there may be occasional setbacks, it works.

• Review your plan annually. Times and circumstances change – and as such your retirement plan may need an adjustment. “Retirement planning isn’t simply a matter of putting some money in a retirement account,” Marotta advises. “It requires periodically working through the mathematical assumptions and projections required to ensure you will meet your retirement goals. Annual reviews guarantee that the changes in your lifestyle are minimized and the chances of meeting your retirement goal are maximized.”

• Seek help if needed. If you don’t feel confident in knowing how or how much to save for retirement, get help. If you pick the right advisor, she can be a tremendous asset in making sure your retirement is fully funded and secure.

Whether retirement is just around the corner or a long way off, begin today with these steps to make your dreams of a great retirement a reality.

Comments

[beastlike]

Sounds like a good plan to me.

Good advice. FMF, I took a look at your Retirement Fund calculator and was a bit surprised by the numbers. Looked like you took a very conservative approach. What did you assume about what you would be earning in terms of returns during your retirement years? Looking at your math, it looks like you assumed 0% (unless you were planning more years than the 25 and used the 25 as a rough proxy for some assumed rate of growth and number of retirement years). The number your method gave me is close to three times what any professional retirement planner has ever told me I need.

[Richard]

You misquoted Marotta. It is every 6 years, not every year. He says: "Every six years you delay funding your retirement you cut in half your standard of living during retirement."

http://www.emarotta.com/article.php?ID=85

[FMF]

1. I did take a conservative approach.

2. I assumed no SS benefits.

3. I used a return of 6%.

For all the details/assumptions, see these two posts:

http://www.freemoneyfinance.com/2006/08/i_set_my_retire.html

http://www.freemoneyfinance.com/2006/08/how_i_set_my_re.html

[FMF]

Richard --

Good catch. I changed it. Thanks.

Ah, I see. I was focusing on the four percent approach. I realize now that that was one of the items you included in your average to arrive at your number. Not knowing all the other methods, I'm not sure how much this was counter-balanced, but clearly this is a conservative approach. Because, unless you did something in the math, the 4% approach that you included in the average assumes a 0% growth rate during your retirement years.

[traineeinvestor]

One important variable to consider is how long you expect your retirement to last. Most of the rules of thumb for estimating how much you need to save (such as 25 x retirement income) implictly assume a given number of years in retirement. 25 x retirement income will be a good number for many people, but if you retire early, it may not be enough.

The other factor is the risk of below average returns (or even negative returns) on your investment in the early years of retirement. This scenario can derail the best of retirement plans.

I may be overly conservative here, but with a possible need for our savings to last 50 years, I will not be comfortable with any retirement plan that assumes any draw down of capital.