CNBC has an article out this morning discussing the dire situation many Americans face when it comes to retirement planning. Astonishingly, “more than half of employees age 55 to 64 say they have not even run a retirement-plan estimate.” Given all that has happened in the world in the last 5-6 years, it is hard to believe that more than 50% of people over 55, theoretically approaching retirement, haven’t even run some analysis to see when they could financially afford to retire. Assuming that most of those people probably aren’t financially ready and further assuming that some people who have run the analysis are still not close to being financially ready, we could be looking at a sizable portion of the baby boomer population who won’t be able to retire in their 60s.
Here’s how I put together my own plan:
1. Get a clear picture of where you currently stand. This will include your retirement accounts, non-retirement investments, bank accounts, house and any other assets. This is called your Net Worth. Here’s a post I did previously on calculating your Net Worth.
2. Analyze your income and savings patterns. How much are you saving every year in absolute dollars and as a percentage of your total income. Most people recommend saving 10-20% of your income. This would be your total savings – retirement contributions, other investments and cash savings. I always include employer contributions into the equation. If your employer is putting 5% of your income, count that towards your savings plan. Ideally that will only serve to increase your total savings, but either way, that is actual money being contributed to your savings plan.
3. Determine how you want to save. I am a believer is using tax-advantaged accounts such as 401k and IRAs, but I also believe in the value of after-tax, easily accessible savings. Read this for more on non-retirement investments.
4. Use a relatively simply Excel model to make projections. Here is a spreadsheet I created for two accounts, but you can easily adjust to your situation (Retirement Projections). An even easier way would be to group all your tax-advantaged accounts into one group and all your taxable investments into the other – then make your projections like that.
5. After you complete Step 4 you are able to see if you need/want to make changes to your savings plan to accomplish your goals. I think it’s safe to withdraw 3-6% a year from your accounts when you’re in retirement, so look at your future balance and determine if that amount will be sufficient for you. Inflation is always a concern, but overtime investments should keep up with inflation. I use lower returns, to capture the annualized real return, meaning, the return over inflation in a given year. Using return figures in the 3-8% annually I think is fair. This is allow you to look at the future balance and future annual income in approximately today’s terms.
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