How much should I have by my current age?
A lot of material crosses my desk in a given week, but one thing that caught my eye recently was a retirement report from J.P. Morgan. One of the charts in the report was titled Retirement Savings Checkpoints. If you’ve ever wondered “How much should I have saved by now?” this chart can give you a rough idea.
Just find your current salary on the top and your age on the left and then draw a line from each until they intersect. The number at the intersection point is how many multiples of your salary you should have saved by now. For example, if you make around $75,000 and you’re 55 years old then you should have about 4.1 times your salary (or about $307,500).
How much should I have by 65?
There is a general rule of thumb that says that most people need about 85% of their pre-retirement income during retirement in order to maintain their standard of living. Research done by Charles Farrell and Aon Hewitt shows that the average person can achieve that 85% replacement rate as long as they have Social Security plus 11-12 times their annual income in savings when they retire (for more on this topic read “The 15 minute retirement readiness review”). So the chart above can give you a rough idea of how much you should have saved for retirement based on your current age and income, but your ultimate goal will be to have around 12 times your annual income in savings when you retire.
That’s just an estimate of course, but it can be a helpful way to quickly gauge your progress. Ideally you’ll want to factor in the specifics of your unique situation when estimating how much you’ll need for retirement. You can do that by working with a trusted adviser or using a tool like our Ideal Retirement Design Guide.
Note: Sorry for the “radio silence” last week at the site. I was on the road visiting clients in Illinois and then spending some time in Tennessee during our daughter’s spring break. We’re trying to get her to all 50 states and Tennessee was number 22. Props to all of our Tennessee readers. We had a great time in Nashville, Franklin and Memphis.
The number one fear of retirees is running out of money. How can you create a predictable paycheck in retirement?
Step 1: Create your retirement budget.
Decide how much money you will need each month in retirement by creating a detailed retirement budget. You can download a free Retirement Budget Worksheet from our Retirement Toolkit.
Step 2: Evaluate your potential income sources.
There are 5 primary sources of retirement income: Social Security, pension, personal investments, passive income like rental property and work (usually part-time). Evaluate which of those income sources will be available to you during retirement and estimate how much income you can derive from each.
Step 3: Compare your budget with your income.
Is your anticipated income enough to cover your anticipated expenses? If not, you may need to delay retirement or find ways to trim your retirement budget.
Step 4: Decide on a claiming strategy for each income source.
With Social Security, you can claim early, on time or late. You might be entitled to spousal benefits or it might make sense for you to file and suspend so your spouse can claim benefits based on your record while your benefits continue to grow. Likewise, there are a number of strategies available when pulling money from your investments, such as dividends only, guaranteed income, systematic withdrawal, bucket strategy and a time segmentation strategy to name a few. All that just to say that for each source of income, there is usually a way to maximize that income based on your unique situation. Working with a competent adviser is usually a good idea when you get to this point. There are a lot of moving parts and the difference between a good strategy and a bad one is usually the difference between…well…a good retirement and a bad one.
Step 5: Retire. Review. Recalibrate.
Having a predictable paycheck doesn’t stop once you retire and turn on your various sources of income. Take time each year to review your withdrawal strategy and make changes as necessary. Some questions to ask yourself:
- Is my withdrawal rate sustainable?
- Is my income still sufficient and keeping pace with inflation?
- Is my asset allocation still appropriate?
- Is the amount of risk I’m taking still suitable?
- Has the value of my assets changed significantly?
- Has my life expectancy changed?
Your answers to those questions will help determine if you need to make changes to your investment and/or distribution strategy.
Bonus: How can I make my money last longer?
Earlier I said that one way to help extend the life of your nest egg is to maximize income from sources like Social Security. What are some additional ways to make your money last?
Dynamic Spending: Take a look at your retirement budget. How many of your expenses are non-negotiable vs. discretionary? If most are non-negotiable, then you will likely be forced to draw money from your investments during inopportune times. If, however, you’re able to set up a budget that has a certain level of discretionary spending, then you can adjust your spending based on market conditions. In down years you can put the discretionary spending on hold and extend the life of your nest egg in the process. Housing and transportation are two of the biggest non-discretionary retirement expenses. Downsizing your house and cars or entering retirement with those things paid for can give you a great deal of flexibility with your spending.
Diversification and asset allocation: Having an appropriate asset allocation helps you mange three key risks: 1) It keeps you from being too aggressive and subject to large declines. 2) It keeps you from being too conservative and subject to inflationary erosion. 3) It will hopefully help your portfolio grow consistently over time so it will last as long as you do.
Stay (or get) healthy: Longevity is a risk because the longer you live, the longer your portfolio will need to last. Even so, most of us want to live as long as possible. Staying active and healthy can save on health care co-pays, prescription costs and (biggest of all) long-term care expenses.
I kept things pretty simple in this post. When you start considering things like inflation, longevity and market fluctuations, the complexity of the predictable paycheck multiplies quickly. If you want to take a deeper dive into some of those issues, feel free to check out The Ideal Retirement Design Guide.
Some people have the time, temperament, knowledge and discipline to handle their own finances, while others could use a little help. Regardless of which category you fall into, you should seriously consider hiring an adviser to help you when it comes to retirement. Why? Because the financial issues facing a retiree are very different than the financial issues facing a pre-retiree.
Whether we do it or not, most of us are at least familiar with the concept of saving. Saving is a pre-retirement issue. We’re usually less familiar with concepts like cash flow management, determining how much we need to retire, pension payout options, retirement plan distributions, estate planning, maximizing Social Security, researching and obtaining health insurance and the tax consequences of certain distribution strategies. Those are post-retirement issues. Those are issues that most of us don’t deal with very often, so getting a little help is probably a wise move.
To help people evaluate their retirement knowledge, The American College of Financial Services recently developed a retirement literacy quiz. They gave the quiz to 1,019 Americans ages 60 to 75 who had at least $100,000 in assets. How did they do? Eighty percent of the people failed. Ouch! Fourteen percent got a Gentleman’s D. Less than one percent got an A. Those results reaffirm the point I was making earlier. Most people aren’t familiar with the types of financial issues that they will be dealing with in retirement and could benefit from some help.
I’d encourage you to take the retirement quiz and see how you do (Full Disclosure: I got 100%, but hey, this is what I do for a living!). Hopefully long time readers will do better than most since I’ve written on many of the topics before, but if you miss your fair share, consider reaching out for some help. Maybe that means hiring an adviser. Maybe it just means browsing past articles in our Archives or picking up a resource from our Store like The Ideal Retirement Design Guide. Bottom line: get some help if you need it. Don’t let mistakes derail your retirement.
Last week we got a taste of something that we haven’t experienced in awhile: Volatility. A wave of anxiety swept through the markets, pushing the Dow into negative territory for the year and handing the S&P 500 its worst week in two years.
What is causing the selling? There are plenty of headlines to choose from. Argentina is close to (another) default. Israel and Hamas are fighting in Gaza. Tensions in Ukraine have continued to worsen. The economy in Europe is sluggish. Banking issues are percolating again in Portugal. And above all of these, it seems, is the fear that the Fed will soon reverse course and begin to raise interest rates.
I have no idea if this is the beginning of a broader selloff or just a temporary breather before markets quickly resume their march higher. One thing I do know, however, is that markets have had five years of uninterrupted gains. Anytime that happens, it’s easy to become complacent with your investment portfolio and that complacency can be a very dangerous thing when you’re close to (or in) retirement.
With that in mind, let’s pretend that the recent volatility is a canary in the coalmine, warning us of a major pullback. What can you do to protect your nest egg?
As I said earlier, after 5 years of gains it’s easy to become complacent and just assume that the path of least resistance is higher. If history is any guide, however, we’re long overdue for a correction. How would your portfolio fare if the markets dropped 10%? How about 20%? Or what if we have a repeat of 2008 and they dropped nearly 40%. Would that affect your plans for retirement? If so, some changes may be in order.
Stock and bond markets rarely move in lockstep. Sometimes stocks outperform. Sometimes bonds. One consequence of this is that, left untouched, your portfolio will gradually get out of balance. The longer this imbalance is allowed to persist, the worse it gets. Take a look at the percentage of your portfolio that you have allocated to stocks and bonds. If the relative outperformance in stocks has resulted in that balance being skewed toward stocks, you should consider rebalancing back to your intended allocation.
Of course rebalancing will just get you back to your prior allocation. It’s probably worth asking if that prior allocation is still appropriate for your current circumstances. You’re five years closer to retirement than you were in 2008. A major downturn now might actually derail your plans rather than just causing a bit of anxiety. Rather than rebalancing to a prior allocation, it might be more appropriate to change your allocation altogether. If you’re really close to retirement, you might also consider setting aside a year or two of your expenses in cash so that you can minimize any potential sequence risk (the risk that you will experience negative returns early in retirement).
Those are just a few proactive ways to deal with the inevitable volatility that is part and parcel of our financial markets. For other ideas on how to keep your plans on track you can read this: Anxious? Focus on what you can control.
Next up: I’ve been getting a lot of questions about bonds lately. What if the Fed starts raising rates? How much of my portfolio should be allocated to bonds? What types of bonds are most impacted by rising rates? I’ll dig into those questions and more in my next post.
Have a great week.
Have you ever noticed that the time it takes you to do something expands to fill the time you allow yourself to do it?
I see this most frequently at work. If I have 5 tasks to do and all day to do them, it takes me—surprise!—all day. If I only have half a day to do the same five tasks, however, I am somehow able to check them all off my To-do list before lunch.
I don’t think I’m alone in this. You do it too, right?
Too Much Runway
With that in mind, think about your retirement. The typical retirement age is 65, which means we give ourselves about 45 years to get “Retirement Ready.”
At the risk of stating the obvious, forty-five years is a LONG time. Too long. Giving yourself that much runway almost guarantees that you will procrastinate and not take things very seriously. After all, there’s always next year (or next decade).
What would happen if you only gave yourself 40 years? Or 35? Or 10? Answer: You’d be much more serious about hitting your goal. You’d save aggressively, spend intentionally and invest wisely. How much could you shave off the typical 45-year timeline? Let’s look at an example.
Ben and the Incredible Shrinking Career
We’ll need to make some assumptions here, but just keep in mind that the end result is more important than the assumptions. Let’s say you have a 20-year-old guy named Ben who wants to retire with $1 million. Let’s assume the markets return 8% per year and Ben makes $50,000 per year throughout his entire career and never gets a raise.
Given those criteria, if Ben saves about 5% per year he will hit his $1 million goal in 45 years. But what if he saves more?
Save 10% = Retire in 37 years
Save 15% = Retire in 32 years
Save 20% = Retire in 28 years
Save 25% = Retire in 26 years
So Ben could retire in his 40s or 50s instead of his 60s if he decided to spend his money on mutual funds instead of mojitos.
I’m guessing I have exactly zero readers that are 20 years old, but the above math can apply to you as well. Sure it won’t be as dramatic because you don’t have as many years as Ben, but you’re also not starting from $0, you’re in your prime earning years, your kids are grown and if you’re over 50 then you’re eligible to make catch-up contributions to your retirement accounts.
You probably won’t be able to shave 20 years off, but could you shave off one? Five? Seven? Each year is a year you can spend with your spouse and friends instead of your boss or that difficult client. It’s a year you can spend seeing the world instead of staring at your cubicle. It’s a year you can spend sitting at the beach instead of stuck in meetings.
With so many people behind on their savings, retire later is a common piece of retirement advice. Given human nature, however, retire early might yield better results. And don’t forget…
Life is short. Be intentional
Quick note on a sale we’re having: You may have noticed that I recently opened a store at Intentional Retirement. Almost everything I do at the site is free, but I do have a few things for sale (and several new products on the way). To celebrate the opening, I’m having a sale on the current flagship product, the If Something Happens to Me Kit. Thousands of people have purchased the kit over the years as a tool to fill holes in their planning and organize their financial, legal and insurance affairs. Through Friday of next week (June 28), if you purchase the kit, I’ll throw in a free copy of my book The Bell Lap: The 8 Biggest Mistakes to Avoid as You Approach Retirement (normally $14). A few questions you might have:
Q: If I buy multiple copies of the kit, do I get multiple free copies of the book?
A: Yep. Buy some for friends and family.
Q: Can I forward this email to anyone I know who might be interested?
Q: Will the free book show up in my order details when I place the order?
A: Nope, but it will be in the box when your order arrives
Q: What if I have some other question?
A: Just email me at email@example.com or give me a call at 1-888-391-4344
And now a look at rising interest rates…
How rates got so low
In response to the global financial meltdown in 2007-2008, the Federal Reserve lowered short-term interest rates to historic lows in an effort to stimulate the economy. When that didn’t seem like enough, they started a program of “Quantitative Easing” where they began buying bonds in an effort to lower rates further.
As you might imagine, when a buyer shows up and says “Give me a few trillion dollars of those” the price of “those” tends to rise (more demand = higher prices). With bonds, when prices rise, rates fall. So as the Fed artificially pushed up prices, rates fell further. That was good news if you were borrowing money for a house. Bad news if you were trying to earn a little interest on your money market or CDs.
Investors responded to the 2007-2008 crisis by shifting a disproportionate amount of their money from stocks to bonds. Seeing your stock portfolio drop by half can go a long way toward making you a lover of all things fixed income. With everyone buying bonds, prices rose further and rates fell further. So that brings us to today, where rates are extremely low and most investors are overweight bonds.
What happens when rates rise (as they have started to do)?
Of course the Fed can’t keep printing money and using it to buy its own debt forever. “Wouldn’t be prudent” as Bush 41 would say. When the economy gets better, Bernanke has promised to take away the punch bowl. When that happens, the biggest bond buyer in the market will put away its checkbook and those artificially high bond prices will start to fall. As prices fall, rates will rise. Said another way, all those bonds that people have bought over the last 5 years could start to lose money.
How can I protect myself?
Chairman Bernanke came out this week and said that the economy is looking healthy enough that the Fed will likely wind down its QE program by the middle of next year. Right on cue, rates started to rise and bond prices fell. So how can you protect yourself against rising rates?
First, review your asset allocation. As I said earlier, many investors swore off stocks after 2007 and shifted most of their money to bonds. That could expose them to significant losses if bond prices fall. Look at your portfolio and see what percentage is in things like bonds, stocks and cash. Work with a trusted adviser to make sure that the balance is appropriate for your circumstances and risk tolerance.
Second, review the duration of your bonds. Not all bonds respond the same to rising and falling interest rates. Duration measures how sensitive a bond is to a change in rates. The higher the duration, the more sensitive the bond. If a bond (or bond fund) has a duration of 10, it will typically fall in value by 10% if rates rise by 1%. If it only has a duration of 3, it will fall by 3% if rates rise by 1%. It stands to reason then, that if you expect rates to rise, you should gravitate toward lower duration bonds.
Third, don’t panic. Markets tend to overreact. Rather than focusing on the daily headlines, the best recipe for a good night’s sleep is to make sure that you have a well balanced, diversified portfolio that is appropriate for your circumstances and goals.
Any other questions about bonds? Put them in the comments section below and I’ll do my best to answer them. Have a great weekend!