All of us daydream about retirement. We look forward to the days where we can sleep in late, travel the country and spend time with our families instead of long days at the office. Unfortunately, the planning part isn’t quite as fun as daydreaming. And figuring out how much you’ll need to live comfortably for the rest of your life is no easy task. The good thing is there are lots of ways to save and invest your earnings to ensure your retirement is everything you dreamed it would be.
The first step to planning for retirement is to figure out how much you’ll need to live on. According to a survey by AAG, 25% of Americans believed they needed $1,000,000 in order to retire, while 53% thought they could survive on less than $500,000. The truth is, there’s no one magic number. The amount you’ll need to save is dependent upon your specific lifestyle and how you wish to live. If you’ve already paid off your mortgage and don’t plan on moving after retirement, that eliminates a major expense and will allow you to live on less than someone who plans to buy a beachfront property as soon as they turn 65. By creating a plan detailing the specifics of how you’ll live for the 30+ years following retirement is a great place to start.
After you’ve settled on a number that works for you, you’ll then be able to start planning on how to achieve this goal. Using an employer-sponsored retirement plan, like a 401k, is one of the best places to start. Employers often match up to a certain percentage, typically around 6%, making for great additional earnings that really add up over time. It’s important that you don’t rely on these accounts for emergencies or otherwise unless you’ve exhausted all other options because the penalties for withdrawal before you reach 60 are often steep. Making sure you have an emergency fund containing the amount you’d need to survive for 3 months can really help to avoid having to withdraw from these accounts early and give you the piece of mind should you require them.
Americans were also asked at what age they planned to retire as part of this survey. The majority responded with the 65-70 age range correlating to when many begin to take advantage of social security benefits. It’s increasingly important for people not to rely on this type of income in the event that reserves are depleted. Instead, contributing to a Roth IRA in addition to your 401k can be a great way to accumulate savings. And best yet, because you pay taxes while contributing to this type of account, you won’t pay anything when it comes time to retire.
Let’s face it, the odds are pretty slim that you’ll win the lottery. In fact, only 1 in 300 million Americans will get so lucky in their lifetime. However, becoming a millionaire by saving and investing is much, much more attainable and 1 in every 30 Americans reaches this goal. Now is the time to give some serious thought to making your retirement dreams a reality.
Andrew is a corporate finance consultant living in Los Angeles, specializing in distressed and bankrupt consulting. He helps clients review business plans and the general market and decide what steps to take next. He has a masters in finance.
Andrew enjoys running and biking in the San Gabriel mountains, cheering for the San Francisco Giants and eating (but trying not to gain weight).