Written by The Husband: Barry Myers
This week at work we had someone in to discuss our retirement plan. He covered the basics of tax-deferred savings and company matching and all the other stuff you’d expect from a guy pitching a 401k. Good for him. But as I looked around the room and chatted with a few co-workers, I realized there are so many of us out there who want to retire eventually but have no plan. Because that gave me the shudders, I thought today I would share my take on some of the basic questions you need to answer to prepare for retirement and make sure I address a couple of the common excuses people give instead of taking action. Let’s dive in.
How much money do I need to be able to retire?
There are lots of formulas out there, but the simplest and best one I’ve heard (and the one I use) involves three simple steps:
- Pick the dollar amount you think you’ll need to be able to meet your financial needs each year at retirement.
- Unless you’re really close to retirement age, bump up that number 30% or so to give you a rough cover for inflation (multiply the number in #1 by 1.3).
- Take the number you came up with in #2 and divide it by 8% (or .08).That gives you a lump sum amount you should have in a good retirement fund to be ready to live off the interest.
Example: Let’s say you think you’ll need about $40,000 per year in retirement. Adding 30% ($40,000 x 1.3), we get to $52,000. $52,000 ÷ .08 = $650,000. What does that mean? That means if you have $650,000 in the bank and can earn roughly 8% interest per year in your investments (very possible), you should be able to draw off $52,000 per year without ever touching the principal amount. Rinse and repeat annually.
How Much Should I Save?
Dave Ramsey recommends saving 15% of your take-home pay from each paycheck and putting it toward retirement. That’s a good rule of thumb. Keep in mind if you’re really close to retirement age this may not be enough. If you’re really young, this is PLENTY and you may want to save a little less while you’re focusing on paying cash for your car(s), paying off your house, etc.
Where Should I Put My Retirement Savings?
Man, oh man – if I could answer that question I’d be a billionaire already. Let me lay out the simple points. Don’t put it in a savings account. It won’t grow. It is safe, but it won’t grow. Don’t put it in single stocks. That’s too risky and you’re betting a lot when you buy single stocks. Consider a mix of stock-based mutual funds and low-risk bonds. Mutual funds are huge accounts that have lots of different stocks in them, giving you a happy mix of risk and return. Bonds are debt sold by a company to raise money. They pay back the debt with interest and you get paid. Of course there are all kinds of details here that a broker should walk you through, but this should get you started on your quest and these two investment types are the simplest and safest way to get started while making a decent return.
I’m Too Old/Young to Save for Retirement. Why Bother to Start Now?
Not true. You may have some catching up to do or you may be lucky enough to have a head start. Either way, as Jon Acuff wrote in a great little book called Quitter, “…not doing anything is its own decision, and the odds of failure are horrible.” Get started!
I Want to Save For Retirement, but I Can’t Afford to.
Boy, I’m gonna get some hateful comments when I say this, but here goes…In 98% of the cases, that’s a lie. You CHOOSE not to save for retirement. You want your stuff now and are being lazy about saving. You’ll be working for the rest of your life or depend on me to support you when you can’t work any longer. There are a few who can’t afford to save for now, but most of you out there are just being lazy. If you are claiming that excuse, look hard at your budget (you are doing a budget, right?!) and prove it. Then set a goal to start saving and work the plan to get there.
I could write a book about this, and many people have, but I’d better stop here. Since I’ve only scratched the surface, I’m happy to try and address any questions you have so feel free to add them in the comments.
I’d love to hear from you – what’s your plan for retirement?