How to finance your future
Roughly 75% of Americans over 40s fail to save for retirement and almost a third report having no retirement savings at all. With the future of social security somewhat unclear, preparing for retirement today is essential to finance your future. Oddly enough, in my experience, I see that many people approaching retirement have not given any thought to how they will generate income after losing their paycheck. Of course, you can receive $ 20,000 to $ 40,000 in Social Security benefits, but that may simply not be enough to cover rising health care costs, general inflation of goods and services, and any emergencies. which may occur in 20 to 30 years. retirement period. That doesn’t even include the fun stuff, and isn’t that the point of the retreat, at least to some extent? You have worked hard for the past 40 years or so, and now is the time to reap the rewards of your labor. If you haven’t prepared well for your retirement, these fruits might not be what you hoped for.
On your journey to retirement, there are important steps to consider and routes you can take to help you reach your destination. A wrong turn can lead to a much longer trip. One of the biggest mistakes I see is procrastination. It got us in trouble preparing for a college exam, and now it gets us in trouble as we prepare for a successful retirement. Having a roadmap in place is essential to making informed decisions on how best to proceed. If your savings are not properly invested, you lose time every day and, most importantly, you lose the benefits of compound interest. The first step on the road to retirement is finding your âretirement numberâ. Sounds clichÃ©, doesn’t it? However, identifying this number will help you determine how close to achieving your desired retirement lifestyle is. Your retirement number is the sum of the liquid assets needed to produce a targeted cash flow in retirement.
As we go through these examples, keep in mind that the numbers we use may change depending on your specific lifestyle, but the concepts and general math will remain the same. For example, let’s say you spend $ 100,000 in total before taxes each year. If a $ 100,000 lifestyle is what you want to live in retirement, then you need to know how much that lifestyle will cost in future dollars, including the impact of inflation on goods and services. So if retirement is 20 years from now and we use an assumed US long-term inflation rate of 3.5%, in retirement you will need around $ 198,000 to live a similar lifestyle. . Maybe you want to travel more in retirement and spend $ 120,000 a year, or maybe you simplify your life in retirement and anticipate that you will only need $ 80,000 a year. In either case, be sure to apply the inflation rate to the years remaining until your retirement date.
Once you’ve estimated your future cash flow needs, you need to subtract any fixed income from sources like Social Security, pensions, or rental property. Let’s say these sources together provide about $ 80,000 in annual income. Therefore, the actual required annual shortfall of your asset base is $ 118,000 ($ 198,000, the amount needed per year of retirement, minus $ 80,000, the annual income amount). The general rule of thumb is that you don’t want to spend more than 4% of your investment assets on an annual basis. This so-called 4% sustainable distribution rule aims to provide a retiree with a withdrawal rate that will allow the asset base to be sustained over a 20 to 30 year retirement period. To find your number, simply divide your shortfall by 4% (in this case, $ 118,000 divided by 0.04), which gives us a goal of about $ 2.9 million in accumulated assets at the retirement.
Now that you know approximately how much you will need in retirement, you will need to design a savings rate and an investment plan to help you do this. Here’s where makeup becomes essential and why procrastination is a successful retirement killer. Let’s say Lucy starts saving at age 30 for 10 years at $ 18,000 per year. She stops at 40 and no longer saves a penny. His total contributions were $ 180,000. Alex, meanwhile, starts saving at age 45, at $ 18,000 per year for 20 years. The sum of the contributions for Alex was $ 360,000. Assuming Alex and Lucy earn a 7% annualized rate of return and turn 65 at the same time, Alex will be around $ 789,000 at 65, while Lucy will be $ 1.4 million. So when it comes to saving for retirement, there really is no time like the present.
Finally, once you have determined how much you need to save (my suggestion is as much as you can), you will need to bear a growth rate and a tax burden on your investments. Remember, when we started this example, I noted a lifestyle of $ 100,000 before taxes. Tax rates are a constant and somewhat unknown variable, as are returns on short-term investments. From a tax perspective, the best you can do is use current tax laws to provide a tax-efficient environment for your assets. Using strategies like Roth conversions, harvesting tax losses, asset locating, 1031 exchanges, installment sales, and charitable trusts can help reduce the tax burden on your investments. Every dollar saved on taxes is another dollar added to your retirement number. As Americans, paying taxes is our duty, but paying too much is certainly not.
Taking the time now to reflect on your personal retirement expectations and make simple projections will help you decide how you plan to finance your future, but until when – start today.